Munich Personal RePEc Archive

Levy Subordinator Model of Default Dependency

Balakrishna, B S (2010): Levy Subordinator Model of Default Dependency.

This is the latest version of this item.

[img]
Preview
PDF
MPRA_paper_24055.pdf

Download (278Kb) | Preview

Abstract

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.

Available Versions of this Item

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.