Credit contagion and risk management with multiple non-ordered defaults
AbstractThe classical reduced-form and filtration expansion framework in credit risk is extended to the case of multiple, non-ordered defaults, assuming that conditional densities of the default times exist. Intensities and pricing formulas are derived, revealing how information driven default contagion arises in these models. We then analyze the impact of ordering the default times before expanding the filtration. While not important for pricing, the effect is significant in the context of risk management, and becomes even more pronounced for highly correlated and asymmetrically distributed defaults. Finally, we provide a general scheme for constructing and simulating the default times, given that a model for the conditional densities has been chosen.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1104.5272.
Date of creation: Apr 2011
Date of revision: Jun 2011
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-05-07 (All new papers)
- NEP-BAN-2011-05-07 (Banking)
- NEP-RMG-2011-05-07 (Risk Management)
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- Umut Cetin & R. Jarrow & P. Protter & Y. Yildirim, 2004.
"Modeling credit risk with partial information,"
LSE Research Online Documents on Economics
2840, London School of Economics and Political Science, LSE Library.
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