Levy Subordinator Model of Default Dependency
The article presents a model of default dependency based on Levy subordinator. It is a tractable one-factor model with an architecture similar to that of the standard Gaussian copula model, providing easy calibration to individual hazard rate curves and efficient pricing with Fast Fourier Transform techniques. The subordinator is a stable Levy process with a probability distribution function known as the Levy distribution. The model provides a reasonable fit to market data with two parameters necessary to assess dependency risk, a measure of correlation and a measure of catastrophe.
|Date of creation:||14 Mar 2010|
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- Giuseppe Di Graziano & L. C. G. Rogers, 2009. "A Dynamic Approach To The Modeling Of Correlation Credit Derivatives Using Markov Chains," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(01), pages 45-62.
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- Damiano Brigo & Andrea Pallavicini & Roberto Torresetti, 2008. "Default correlation, cluster dynamics and single names: The GPCL dynamical loss model," Papers 0812.4163, arXiv.org.
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