A Semi-Analytical Parametric Model for Dependent Defaults

Balakrishna, B S (2006): A Semi-Analytical Parametric Model for Dependent Defaults.

Abstract

A semi-analytical parametric approach to modeling default dependency is presented. It is a multi-factor model based on instantaneous default correlation that also takes into account higher order default correlations. It is capable of accommodating a term structure of default correlations and has a dynamic formulation in the form of a continuous time Markov chain. With two factors and a constant hazard rate, it provides perfect fits to four tranches of CDX.NA.IG and iTraxx Europe CDOs of 5, 7 and 10 year maturities. With time dependent hazard rates, it provides perfect fits to all the five tranches for all three maturities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Default Risk; Default Correlation; CDO; Markov Chain; Semi-analytical; Parametric
• Subjects: G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing

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