Copula-Based Default Dependence Modelling: Where Do We Stand?
AbstractCopula functions have proven to be extremely useful in describing joint default and survival probabilities in credit risk applications. We overview the state of the art and point out some open modelling issues. We discuss first joint default modelling in diffusion based structural models, then in intensity based ones, focusing on the possibility - and the dynamic inconsistency - of re-mapping a model of the second type into one of the first. For both types of models, we discuss calibration issues under the risk neutral measure, using the factor copula device. The survey leads us to focus on a non-diffusive structural model, which can be re-mapped in a dynamic consistent intensity-based one, and which can be calibrated under a risk neutral measure without assuming equicorrelation.
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Bibliographic InfoPaper provided by ICER - International Centre for Economic Research in its series ICER Working Papers - Applied Mathematics Series with number 21-2007.
Length: 24 pages
Date of creation: Mar 2007
Date of revision:
default dependence; copula functions; risk neutral versus historical dependence;
Find related papers by JEL classification:
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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