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Default Contagion in Large Homogeneous Portfolios


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  • Herbertsson, Alexander

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

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    We study default contagion in large homogeneous credit portfolios. Using data from the iTraxx Europe series, two synthetic CDO portfolios are calibrated against their tranche spreads, index CDS spreads and average CDS spreads, all with five year maturity. After the calibrations, which render perfect fits, we investigate the implied expected ordered defaults times, implied default correlations, and implied multivariate default and survival distributions, both for ordered and unordered default times. Many of the numerical results differ substantially from the corresponding quantities in a smaller inhomogeneous CDS portfolio. Furthermore, the studies indicate that market CDO spreads imply extreme default clustering in upper tranches. The default contagion is introduced by letting individual intensities jump when other defaults occur, but be constant between defaults. The model is translated into a Markov jump process. Expressions for the investigated quantities are derived by using matrix-analytic methods.

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    Bibliographic Info

    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 272.

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    Length: 25 pages
    Date of creation: 31 Oct 2007
    Date of revision:
    Publication status: Forthcoming in The Credit Derivatives Handbook : Global Perspectives, Innovations and Market Drivers, Gregoriou, Greg N. , Ali, Paul (eds.), 2007, chapter xx, McGraw-Hill.
    Handle: RePEc:hhs:gunwpe:0272

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    Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
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    Related research

    Keywords: Credit risk; intensity-based models; dependence modelling; default contagion; Markov jump processes; Matrix-analytic methods; synthetic CDO-s; index CDS-s;

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