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An exponential model for dependent defaults

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  • Giesecke, Kay

Abstract

A thorough understanding of the joint default behavior of credit-risky securities is essential for credit risk measurement as well as the valuation of multi-name credit derivatives and Collateralized Debt Obligations. In this paper we study a simple and tractable intensity-based model for correlated defaults, in which unpredictable default arrival times are jointly exponentially distributed. Since all critical results are given in closedform, the model can be easily mplemented. The efficient simulation of dependent default times for pricing and risk management purposes is straightforward as well. Parameter calibration relies on readily available market data as well as data and figures provided by rating agencies and credit risk management solutions.

Suggested Citation

  • Giesecke, Kay, 2002. "An exponential model for dependent defaults," SFB 373 Discussion Papers 2002,52, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  • Handle: RePEc:zbw:sfb373:200252
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    References listed on IDEAS

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    1. Görz, Nicole & Hildebrandt, Lutz & Annacker, Dirk, 2000. "Analyzing multigroup data with structural equation models," SFB 373 Discussion Papers 2000,11, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    2. Gerhard Arminger & Petra Stein & Jörg Wittenberg, 1999. "Mixtures of conditional mean- and covariance-structure models," Psychometrika, Springer;The Psychometric Society, vol. 64(4), pages 475-494, December.
    3. Asim Ansari & Kamel Jedidi & Sharan Jagpal, 2000. "A Hierarchical Bayesian Methodology for Treating Heterogeneity in Structural Equation Models," Marketing Science, INFORMS, vol. 19(4), pages 328-347, August.
    4. Kamel Jedidi & Harsharanjeet S. Jagpal & Wayne S. DeSarbo, 1997. "Finite-Mixture Structural Equation Models for Response-Based Segmentation and Unobserved Heterogeneity," Marketing Science, INFORMS, pages 39-59.
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    Cited by:

    1. Abel Elizalde, 2006. "Credit Risk Models I: Default Correlation In Intensity Models," Working Papers wp2006_0605, CEMFI.

    More about this item

    Keywords

    simulation; correlated defaults; multivariate exponential model;

    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

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