A Semi-Analytical Parametric Model for Dependent Defaults
AbstractA semi-analytical parametric approach to modeling default dependency is presented. It is a multi-factor model based on instantaneous default correlation that also takes into account higher order default correlations. It is capable of accommodating a term structure of default correlations and has a dynamic formulation in the form of a continuous time Markov chain. With two factors and a constant hazard rate, it provides perfect fits to four tranches of CDX.NA.IG and iTraxx Europe CDOs of 5, 7 and 10 year maturities. With time dependent hazard rates, it provides perfect fits to all the five tranches for all three maturities.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 14918.
Date of creation: 16 Aug 2006
Date of revision: 15 May 2007
Default Risk; Default Correlation; CDO; Markov Chain; Semi-analytical; Parametric;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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NBER Working Papers
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