Delayed Default Dependency and Default Contagion
AbstractDelayed, hence non-simultaneous, dependent defaults are discussed in a reduced form model. The model is a generalization of a multi-factor model based on simultaneous defaults to incorporate delayed defaults. It provides a natural smoothening of discontinuities in the joint probability densities in models with simultaneous defaults. It is a dynamic model that exhibits default contagion in a multi-factor setting. It admits an efficient Monte Carlo simulation algorithm that can handle heterogeneous collections of credit names. It can be calibrated to provide exact fits to CDX.NA.IG and iTraxx Europe CDOs just as its version with simultaneous defaults.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 14921.
Date of creation: 16 Apr 2007
Date of revision: 15 May 2007
Default Risk; Default Correlation; Default Contagion; Delayed Default; CDO; Monte Carlo;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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- Robert A. Jarrow, 2001. "Counterparty Risk and the Pricing of Defaultable Securities," Journal of Finance, American Finance Association, vol. 56(5), pages 1765-1799, October.
- Giesecke, Kay, 2001. "Correlated default with incomplete information," SFB 373 Discussion Papers 2002,30, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
- Balakrishna, B S, 2010. "Levy Subordinator Model: A Two Parameter Model of Default Dependency," MPRA Paper 26274, University Library of Munich, Germany.
- Balakrishna, B S, 2008. "Levy Density Based Intensity Modeling of the Correlation Smile," MPRA Paper 14922, University Library of Munich, Germany, revised 06 Apr 2009.
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