A Markov Copula Model of Portfolio Credit Risk with Stochastic Intensities and Random Recoveries
AbstractIn , the authors introduced a Markov copula model of portfolio credit risk. This model solves the top-down versus bottom-up puzzle in achieving efficient joint calibration to single-name CDS and to multi-name CDO tranches data. In , we studied a general model, that allows for stochastic default intensities and for random recoveries, and we conducted empirical study of our model using both deterministic and stochastic default intensities, as well as deterministic and random recoveries only. Since, in case of some “badly behaved” data sets a satisfactory calibration accuracy can only be achieved through the use of random recoveries, and, since for important applications, such as CVA computations for credit derivatives, the use of stochastic intensities is advocated by practitioners, efficient implementation of our model that would account for these two issues is very important. However, the details behind the implementation of the loss distribution in the case with random recoveries were not provided in . Neither were the details on the stochastic default intensities given there. This paper is thus a complement to , with a focus on a detailed description of the methodology that we used so to implement these two model features: random recoveries and stochastic intensities.
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Bibliographic InfoPaper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 545.
Length: 21 pages
Date of creation: 16 Oct 2012
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Portfolio Credit Risk; Markov Copula Model; Common Shocks; Stochastic Spreads; Random Recoveries;
Find related papers by JEL classification:
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-27 (All new papers)
- NEP-BAN-2012-10-27 (Banking)
- NEP-RMG-2012-10-27 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Damiano Brigo & Andrea Pallavicini & Roberto Torresetti, 2007. "Cluster-Based Extension Of The Generalized Poisson Loss Dynamics And Consistency With Single Names," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(04), pages 607-631.
- Youssef Elouerkhaoui, 2007. "Pricing And Hedging In A Dynamic Credit Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(04), pages 703-731.
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