Balakrishna, B S (2010): Levy Subordinator Model of Default Dependency.
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This article presents a model of default dependency based on Levy subordinator. It is a tractable dynamical model, computationally structured similar to the one-factor Gaussian copula model, providing easy calibration to individual hazard rate curves and efficient pricing with Fast Fourier Transform techniques. The subordinator is an alpha=1/2 stable Levy process, maximally skewed to the right, with its distribution function known in closed form as the Levy distribution. The model provides a reasonable fit to market data with just two parameters to assess dependency risk, a measure of correlation and that of the likelihood of a catastrophe.
|Item Type:||MPRA Paper|
|Original Title:||Levy Subordinator Model of Default Dependency|
|Keywords:||CDO, Default Risk, Levy Distribution, Levy Subordinator, FFT, Gaussian Copula|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing
|Depositing User:||S Balakrishna|
|Date Deposited:||16. Apr 2010 14:37|
|Last Modified:||25. Feb 2013 11:44|
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Levy Subordinator Model of Default Dependency. (deposited 14. Mar 2010 20:58)
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