Levy Subordinator Model of Default Dependency
AbstractThe article presents a model of default dependency based on Levy subordinator. It is a tractable one-factor model with an architecture similar to that of the standard Gaussian copula model, providing easy calibration to individual hazard rate curves and efficient pricing with Fast Fourier Transform techniques. The subordinator is a stable Levy process with a probability distribution function known as the Levy distribution. The model provides a reasonable fit to market data with two parameters necessary to assess dependency risk, a measure of correlation and a measure of catastrophe.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 21386.
Date of creation: 14 Mar 2010
Date of revision:
CDO; Default Risk; Levy Distribution; Levy Subordinator; FFT; Gaussian Copula;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-28 (All new papers)
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.
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- Damiano Brigo & Andrea Pallavicini & Roberto Torresetti, 2009. "Credit models and the crisis, or: how I learned to stop worrying and love the CDOs," Papers 0912.5427, arXiv.org, revised Feb 2010.
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- 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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