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The Application Of Copulas In Pricing Dependent Credit Derivatives Instruments

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  • Fathi Abid
  • Nader Naifar

Abstract

The aim of this paper is to use copulas functions to capture the different structures of dependency when we deal with portfolios of dependent credit risks and a basket of credit derivatives. We first present the wellknown result for the pricing of default risk, when there is only one defaultable firm. After that, we expose the structure of dependency with copulas in pricing dependent credit derivatives. Many studies suggest the inadequacy of multinormal distribution and then the failure of methods based on linear correlation for measuring the structure of dependency. Finally, we use Monte Carlo simulations for pricing Collateralized debt obligation (CDO) with Gaussian an Student copulas.

Suggested Citation

  • Fathi Abid & Nader Naifar, 2008. "The Application Of Copulas In Pricing Dependent Credit Derivatives Instruments," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ).
  • Handle: RePEc:ush:jaessh:v:3:y:2008:i:2(4)_summer2008:18
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    References listed on IDEAS

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    1. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-367, May.
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