Discrete tenor models for credit risky portfolios driven by time-inhomogeneous L\'evy processes
The goal of this paper is to specify dynamic term structure models with discrete tenor structure for credit portfolios in a top-down setting driven by time-inhomogeneous L\'evy processes. We provide a new framework, conditions for absence of arbitrage, explicit examples, an affine setup which includes contagion and pricing formulas for STCDOs and options on STCDOs. A calibration to iTraxx data with an extended Kalman filter shows an excellent fit over the full observation period. The calibration is done on a set of CDO tranche spreads ranging across six tranches and three maturities.
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- Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
- Philippe Ehlers & Philipp J. Schoenbucher, 2006.
"Background Filtrations andCanonical Loss Processes for Top-Down Models of Portfolio Credit Risk,"
Swiss Finance Institute Research Paper Series
07-07, Swiss Finance Institute.
- 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.
- 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.
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