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Levy Subordinator Model of Default Dependency

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  • Balakrishna, B S
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    Abstract

    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.

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    File URL: https://mpra.ub.uni-muenchen.de/21386/1/MPRA_paper_21386.pdf
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    File URL: https://mpra.ub.uni-muenchen.de/22090/1/MPRA_paper_22090.pdf
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    File URL: https://mpra.ub.uni-muenchen.de/24055/2/MPRA_paper_24055.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21386.

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    Date of creation: 14 Mar 2010
    Handle: RePEc:pra:mprapa:21386
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    Keywords: CDO; Default Risk; Levy Distribution; Levy Subordinator; FFT; Gaussian Copula;

    Find related papers by JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    This paper has been announced in the following NEP Reports:

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    1. 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.
    2. Damiano Brigo & Andrea Pallavicini & Roberto Torresetti, 2009. "Credit models and the crisis, or: how I learned to stop worrying and love the CDOs," Papers 0912.5427, arXiv.org, revised Feb 2010.
    3. Balakrishna, B S, 2008. "Levy Density Based Intensity Modeling of the Correlation Smile," MPRA Paper 14922, University Library of Munich, Germany, revised 06 Apr 2009.
    4. Alexander Chapovsky & Andrew Rennie & Pedro Tavares, 2007. "Stochastic Intensity Modeling For Structured Credit Exotics," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(04), pages 633-652.
    5. 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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    Cited by:

    1. Balakrishna, B S, 2010. "Levy Subordinator Model: A Two Parameter Model of Default Dependency," MPRA Paper 26274, University Library of Munich, Germany.

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