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Levy Density Based Intensity Modeling of the Correlation Smile

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  • Balakrishna, B S
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    Abstract

    The jump distribution for the default intensities in a reduced form framework is modeled and calibrated to provide reasonable fits to CDX.NA.IG and iTraxx Europe CDOs, to 5, 7 and 10 year maturities simultaneously. Calibration is carried out using an efficient Monte Carlo simulation algorithm suitable for both homogeneous and heterogeneous collections of credit names. The underlying jump process is found to relate closely to a maximally skewed stable Levy process with index of stability alpha ~ 1.5.

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    File URL: http://mpra.ub.uni-muenchen.de/14922/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14922.

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    Date of creation: 16 Jul 2008
    Date of revision: 06 Apr 2009
    Handle: RePEc:pra:mprapa:14922

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    Related research

    Keywords: Default Risk; Default Correlation; Default Intensity; Intensity Model; Levy Density; CDO; Monte Carlo;

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    References

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    1. Balakrishna, B S, 2007. "Delayed Default Dependency and Default Contagion," MPRA Paper 14921, University Library of Munich, Germany, revised 15 May 2007.
    2. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
    3. Damiano Brigo & Andrea Pallavicini & Roberto Torresetti, 2008. "Default correlation, cluster dynamics and single names: The GPCL dynamical loss model," Quantitative Finance Papers 0812.4163, arXiv.org.
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    Cited by:
    1. Balakrishna, B S, 2010. "Levy Subordinator Model of Default Dependency," MPRA Paper 21386, University Library of Munich, Germany, revised 22 Jul 2010.
    2. Balakrishna, B. S., 2010. "Levy subordinator model: A two parameter model of default dependency," MPRA Paper 26274, University Library of Munich, Germany, revised 18 Aug 2011.

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