IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v11y2008i02ns0219024908004762.html
   My bibliography  Save this article

A New Framework For Dynamic Credit Portfolio Loss Modelling

Author

Listed:
  • JAKOB SIDENIUS

    (JP Morgan Securities Ltd., 125 London Wall, London, EC2Y 5AJ, UK)

  • VLADIMIR PITERBARG

    (Barclays Capital, 5 The North Colonnade, London, W1U 6BX, UK)

  • LEIF ANDERSEN

    (Bank of America Securities, 9 West 57th Street, New York, NY 10019, USA)

Abstract

We present the SPA framework, a novel approach to the modeling of the dynamics of portfolio default losses. In this framework, models are specified by a two-layer process. The first layer models the dynamics of portfolio loss distributions in the absence of information about default times. This background process can be explicitly calibrated to the full grid of marginal loss distributions as implied by initial CDO tranche values indexed on maturity, as well as to the prices of suitable options. We give sufficient conditions for consistent dynamics. The second layer models the loss process itself as a Markov process conditioned on the path taken by the background process. The choice of loss process is non-unique. We present a number of choices, and discuss their advantages and disadvantages. Several concrete model examples are given, and valuation in the new framework is described in detail. Among the specific securities for which algorithms are presented are CDO tranche options and leveraged super-senior tranches.

Suggested Citation

  • Jakob Sidenius & Vladimir Piterbarg & Leif Andersen, 2008. "A New Framework For Dynamic Credit Portfolio Loss Modelling," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(02), pages 163-197.
    • Handle: RePEc:wsi:ijtafx:v:11:y:2008:i:02:n:s0219024908004762
    DOI: 10.1142/S0219024908004762
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024908004762
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024908004762?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Philippe Ehlers & Philipp Schönbucher, 2009. "Background filtrations and canonical loss processes for top-down models of portfolio credit risk," Finance and Stochastics, Springer, vol. 13(1), pages 79-103, January.
    2. Schönbucher, Philipp J., 2000. "A Libor Market Model with Default Risk," Bonn Econ Discussion Papers 15/2001, University of Bonn, Bonn Graduate School of Economics (BGSE).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:hum:wpaper:sfb649dp2012-032 is not listed on IDEAS
    2. Barbara Choroś-Tomczyk & Wolfgang Karl H�rdle & Ludger Overbeck, 2014. "Copula dynamics in CDOs," Quantitative Finance, Taylor & Francis Journals, vol. 14(9), pages 1573-1585, September.
    3. Stefan Tappe, 2022. "Invariant cones for jump-diffusions in infinite dimensions," Papers 2206.13913, arXiv.org, revised Nov 2023.
    4. Biagini, Francesca & Mazzon, Andrea & Oberpriller, Katharina, 2023. "Reduced-form framework for multiple ordered default times under model uncertainty," Stochastic Processes and their Applications, Elsevier, vol. 156(C), pages 1-43.
    5. Xixuan Han & Boyu Wei & Hailiang Yang, 2018. "Index Options And Volatility Derivatives In A Gaussian Random Field Risk-Neutral Density Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(04), pages 1-41, June.
    6. Tao Peng, 2010. "Portfolio Credit Risk Modelling and CDO Pricing - Analytics and Implied Trees from CDO Tranches," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2010, January-A.
    7. El Karoui, Nicole & Jeanblanc, Monique & Jiao, Ying, 2017. "Dynamics of multivariate default system in random environment," Stochastic Processes and their Applications, Elsevier, vol. 127(12), pages 3943-3965.
    8. Nicole El Karoui & Monique Jeanblanc & Ying Jiao, 2017. "Dynamics of multivariate default system in random environment," Post-Print hal-01205753, HAL.
    9. Zehra Eksi & Damir Filipovi'c, 2020. "Affine Pricing and Hedging of Collateralized Debt Obligations," Papers 2011.10101, arXiv.org.
    10. Jan Kallsen & Paul Krühner, 2015. "On a Heath–Jarrow–Morton approach for stock options," Finance and Stochastics, Springer, vol. 19(3), pages 583-615, July.
    11. Ernst Eberlein & Zorana Grbac & Thorsten Schmidt, 2010. "Discrete tenor models for credit risky portfolios driven by time-inhomogeneous L\'evy processes," Papers 1006.2012, arXiv.org, revised Apr 2013.
    12. Francesca Biagini & Andrea Mazzon & Katharina Oberpriller, 2021. "Reduced-form framework for multiple ordered default times under model uncertainty," Papers 2108.04047, arXiv.org, revised Oct 2022.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bao, Qunfang & Li, Shenghong & Liu, Guimei, 2010. "Survival Measures and Interacting Intensity Model: with Applications in Guaranteed Debt Pricing," MPRA Paper 27698, University Library of Munich, Germany, revised 27 Dec 2010.
    2. Peter Carr & Travis Fisher & Johannes Ruf, 2014. "On the hedging of options on exploding exchange rates," Finance and Stochastics, Springer, vol. 18(1), pages 115-144, January.
    3. Damiano Brigo & Laurent Cousot, 2006. "The Stochastic Intensity Ssrd Model Implied Volatility Patterns For Credit Default Swap Options And The Impact Of Correlation," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(03), pages 315-339.
    4. Samson Assefa, 2007. "Pricing Swaptions and Credit Default Swaptions in the Quadratic Gaussian Factor Model," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 3-2007, January-A.
    5. Ying Jiao, 2009. "Multiple defaults and contagion risks," Working Papers hal-00441500, HAL.
    6. Fabio Mercurio, 2010. "Modern Libor Market Models: Using Different Curves For Projecting Rates And For Discounting," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(01), pages 113-137.
    7. Nicole El Karoui & Monique Jeanblanc & Ying Jiao, 2013. "Density approach in modelling multi-defaults," Working Papers hal-00870492, HAL.
    8. Nicole El Karoui & Monique Jeanblanc & Ying Jiao, 2017. "Dynamics of multivariate default system in random environment," Post-Print hal-01205753, HAL.
    9. Ernst Eberlein & Zorana Grbac & Thorsten Schmidt, 2010. "Discrete tenor models for credit risky portfolios driven by time-inhomogeneous L\'evy processes," Papers 1006.2012, arXiv.org, revised Apr 2013.
    10. Joao B. C. Garcia & Helmut van Ginderen & Reinaldo C. Garcia, 2003. "On the Pricing of Credit Spread Options: A Two Factor HW–BK Algorithm," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 6(05), pages 491-505.
    11. Ying Jiao, 2009. "Multiple defaults and contagion risks," Papers 0912.3132, arXiv.org.
    12. Gaspar, Raquel M. & Schmidt, Thorsten, 2005. "Quadratic Portfolio Credit Risk models with Shot-noise Effects," SSE/EFI Working Paper Series in Economics and Finance 616, Stockholm School of Economics.
    13. Houweling, Patrick & Vorst, Ton, 2005. "Pricing default swaps: Empirical evidence," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1200-1225, December.
    14. Bao, Qunfang & Chen, Si & Liu, Guimei & Li, Shenghong, 2010. "Unilateral CVA for CDS in Contagion model: With volatilities and correlation of spread and interest," MPRA Paper 28250, University Library of Munich, Germany, revised 27 Dec 2010.
    15. El Karoui, Nicole & Jeanblanc, Monique & Jiao, Ying, 2017. "Dynamics of multivariate default system in random environment," Stochastic Processes and their Applications, Elsevier, vol. 127(12), pages 3943-3965.
    16. Roberto Casarin, 2005. "Stochastic Processes in Credit Risk Modelling," Working Papers ubs0505, University of Brescia, Department of Economics.
    17. Njike Leunga, Charles Guy & Hainaut, Donatien, 2019. "Interbank Credit Risk Modelling with Self-Exciting Jump Processes," LIDAM Discussion Papers ISBA 2019017, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    18. Biagini, Francesca & Mazzon, Andrea & Oberpriller, Katharina, 2023. "Reduced-form framework for multiple ordered default times under model uncertainty," Stochastic Processes and their Applications, Elsevier, vol. 156(C), pages 1-43.
    19. Antonis Papapantoleon, 2010. "Old and new approaches to LIBOR modeling," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 64(3), pages 257-275, August.
    20. Hatem Ben-Ameur & Damiano Brigo & Eymen Errais, 2009. "A dynamic programming approach for pricing CDS and CDS options," Quantitative Finance, Taylor & Francis Journals, vol. 9(6), pages 717-726.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:11:y:2008:i:02:n:s0219024908004762. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.