Background Filtrations andCanonical Loss Processes for Top-Down Models of Portfolio Credit Risk
AbstractIn single-obligor default risk modelling, using a background filtration in conjunction with a suitable embedding hypothesis (generally known as H-hypothesis or immersion property) has proven a very successful tool to separate the actual default event from the model for the default arrival intensity. In this paper we analyze the conditions under which this approach can be extended to the situation of a portfolio of several obligors, with a particular focus on the so-called top-down approach. We introduce the natural H-hypothesis of this setup (the successive H-hypothesis) and show that it is equivalent to a seemingly weaker one-step H-hypothesis. Furthermore, we provide a canonical construction of a loss process in this setup and provide closed-form solutions for some generic pricing problems.
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Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-07.
Length: 25 pages
Date of creation: Dec 2006
Date of revision:
credit risk; default correlation; point processes; generalized Cox processes; hypothesis H;
Other versions of this item:
- Philippe Ehlers & Philipp Schönbucher, 2009. "Background filtrations and canonical loss processes for top-down models of portfolio credit risk," Finance and Stochastics, Springer, vol. 13(1), pages 79-103, January.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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