Levy Density Based Intensity Modeling of the Correlation Smile
AbstractThe 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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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 14922.
Date of creation: 16 Jul 2008
Date of revision: 06 Apr 2009
Default Risk; Default Correlation; Default Intensity; Intensity Model; Levy Density; CDO; Monte Carlo;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-05-02 (All new papers)
- NEP-ECM-2009-05-02 (Econometrics)
- NEP-RMG-2009-05-02 (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, 2008. "Default correlation, cluster dynamics and single names: The GPCL dynamical loss model," Papers 0812.4163, arXiv.org.
- Balakrishna, B S, 2007. "Delayed Default Dependency and Default Contagion," MPRA Paper 14921, University Library of Munich, Germany, revised 15 May 2007.
- 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.
- Balakrishna, B S, 2010. "Levy Subordinator Model of Default Dependency," MPRA Paper 21386, University Library of Munich, Germany.
- Balakrishna, B S, 2010. "Levy Subordinator Model: A Two Parameter Model of Default Dependency," MPRA Paper 26274, University Library of Munich, Germany.
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