Balakrishna, B S (2008): Levy Density Based Intensity Modeling of the Correlation Smile.
Download (192Kb) | Preview
The jump distribution for the default intensities in a reduced form framework is modeled and calibrated to provide reasonable fits to CDX.NA.IG and iTraxx Europe CDOs, to 5, 7 and 10 year maturities simultaneously. Calibration is carried out using an efficient Monte Carlo simulation algorithm suitable for both homogeneous and heterogeneous collections of credit names. The underlying jump process is found to relate closely to a maximally skewed stable Levy process with index of stability alpha ~ 1.5.
|Item Type:||MPRA Paper|
|Original Title:||Levy Density Based Intensity Modeling of the Correlation Smile|
|Keywords:||Default Risk; Default Correlation; Default Intensity; Intensity Model; Levy Density; CDO; Monte Carlo|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing|
|Depositing User:||S Balakrishna|
|Date Deposited:||30. Apr 2009 00:30|
|Last Modified:||20. Feb 2013 19:43|
Altman, E. I., B. Brady, A. Resti and A. Sironi (2005), ``The Link between Default and Recovery Rates: Theory, Empirical Evidence and Implications'', Journal of Business 78, 2203-2228.
Balakrishna, B. S. (2006), ``A Semi-Analytical Parametric Model for Dependent Defaults'', Working paper, http://www.defaultrisk.com/pp_crdrv128.htm.
Balakrishna, B. S. (2007), ``Delayed Default Dependency and Default Contagion'', Working paper, http://www.defaultrisk.com/pp_corr101.htm.
Bennani, N. (2005), ``The Forward Loss Model: A Dynamic Term Structure Approach for the Pricing of Portfolio Credit Derivatives'', Working paper, http://www.defaultrisk.com/pp_crdrv_95.htm.
Brigo, D., A. Pallavicini and R. Torresetti.(2006a) “Calibration of CDO Tranches with the Dynamical Generalized-Poisson Loss Model”, Risk, 20 (2007), May, 70-75.
Brigo, D., A. Pallavicini and R. Torresetti (2006b), ``Default correlation, cluster dynamics and single names: The GPCL dynamical loss model'', Working paper, http://www.defaultrisk.com/ pp_model154.htm.
Chapovsky, A., A. Rennie and P. A. C. Tavares (2006), ``Stochastic Intensity Modeling for Structured Credit Exotics'', Working paper, http://www.defaultrisk.com/pp_crdrv_136.htm.
Di Graziano, G. and C. Rogers (2005), ``A Dynamic Approach to the Modeling of Correlation Credit Derivatives Using Markov Chains'', Working paper, http://www.defaultrisk.com/pp_crdrv_88.htm.
Duffie, D., J. Pan and K. Singleton (1998), ``Transform Analysis and Asset Pricing for Affine Jump-Diffusions'', Econometrica , Vol. 68, (2000), 1343-1376.
Elouerkhaoui, Y. (2003), ``Pricing and Hedging in a Dynamic Credit Model'', Citigroup Working paper.
Errais, E., K. Giesecke and L. Goldberg (2006), ``Pricing Credit from the Top Down with Affine Point Processes'', Working paper, http://www.defaultrisk.com/pp_cdo_16.htm.
Hull, J. and A. White (2007), ``Dynamic Models of Portfolio Credit Risk: A Simplified Approach'', Journal of Derivatives, 15, 4 (Summer 2008), 9-28.
Joshi, M. and A. Stacey (2005), ``Intensity Gamma: A New Approach to Pricing Credit Derivatives'', Risk Magazine, July 2006.
Lindskog, F. and A. McNeil (2003), ``Common Poisson Shock Models: Applications to Insurance and Credit Risk Modeling'', ASTIN Bulletin, 33(2), pp. 209-238.
Putyatin, V., D. Prieul and S. Maslova (2005), ``A Markovian approach to modelling correlated defaults'', Risk Magazine, May 2005.
Schonbucher, P. (2005), ``Portfolio Losses and the Term Structure of Loss Transition Rates: A New Methodology for the Pricing of Portfolio Credit Derivatives'', Working paper, http://www.defaultrisk.com/pp_model_74.htm.
Sidenius, J., V. Piterbarg and L. Andersen (2005), ``A New Framework for Dynamic Credit Portfolio Loss Modeling'', Working paper, http://www.defaultrisk.com/pp_model_83.htm.