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BSLP: Markovian Bivariate Spread-Loss Model for Portfolio Credit Derivatives

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  • Matthias Arnsdorf
  • Igor Halperin

Abstract

BSLP is a two-dimensional dynamic model of interacting portfolio-level loss and spread (more exactly, loss intensity) processes. The model is similar to the top-down HJM-like frameworks developed by Schonbucher (2005) and Sidenius-Peterbarg-Andersen (SPA) (2005), however is constructed as a Markovian, short-rate intensity model. This property of the model enables fast lattice methods for pricing various portfolio credit derivatives such as tranche options, forward-starting tranches, leveraged super-senior tranches etc. A non-parametric model specification is used to achieve nearly perfect calibration to liquid tranche quotes across strikes and maturities. A non-dynamic version of the model obtained in the zero volatility limit of stochastic intensity is useful on its own as an arbitrage-free interpolation model to price non-standard index tranches off the standard ones.

Suggested Citation

  • Matthias Arnsdorf & Igor Halperin, 2009. "BSLP: Markovian Bivariate Spread-Loss Model for Portfolio Credit Derivatives," Papers 0901.3398, arXiv.org.
  • Handle: RePEc:arx:papers:0901.3398
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    File URL: http://arxiv.org/pdf/0901.3398
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    Cited by:

    1. Christian Koziol & Philipp Koziol & Thomas Schön, 2015. "Do correlated defaults matter for CDS premia? An empirical analysis," Review of Derivatives Research, Springer, vol. 18(3), pages 191-224, October.

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