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Simultaneous Calibration To A Range Of Portfolio Credit Derivatives With A Dynamic Discrete-Time Multi-Step Markov Loss Model

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  • MICHAEL B. WALKER

    (Department of Physics, University of Toronto, Toronto, ON M5S 1A7, Canada)

Abstract

This article describes a dynamic discrete-time multi-step Markov model for the losses experienced by a given credit portfolio, and develops a method for the simultaneous calibration of the model to all available relevant market prices (for CDO's, forward-start CDO's, options on CDO's, leveraged super-senior tranches with loss triggers, etc.) established on a given day. The implementation is via an efficient linear programming procedure, and examples are given. The approach represents an extension of previous work (Walker, 2005, 2006; Torresetti et al., 2006) on the static loss-surface model to a model containing the necessary underlying dynamics.

Suggested Citation

  • Michael B. Walker, 2009. "Simultaneous Calibration To A Range Of Portfolio Credit Derivatives With A Dynamic Discrete-Time Multi-Step Markov Loss Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(05), pages 633-662.
    • Handle: RePEc:wsi:ijtafx:v:12:y:2009:i:05:n:s0219024909005439
    DOI: 10.1142/S0219024909005439
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