Fathi, Abid and Nader, Naifar (2007): Copula based simulation procedures for pricing basket Credit Derivatives.

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Abstract
This paper deals with the impact of structure of dependency and the choice of procedures for rareevent simulation on the pricing of multiname credit derivatives such as nth to default swap and Collateralized Debt Obligations (CDO). The correlation between names defaulting has an effect on the value of the basket credit derivatives. We present a copula based simulation procedure for pricing basket default swaps and CDO under different structure of dependency and assessing the influence of different price drivers (correlation, hazard rates and recovery rates) on modelling portfolio losses. Gaussian copulas and Monte Carlo simulation is widely used to measure the default risk in basket credit derivatives. Default risk is often considered as a rareevent and then, many studies have shown that many distributions have fatter tails than those captured by the normal distribution. Subsequently, the choice of copula and the choice of procedures for rareevent simulation govern the pricing of basket credit derivatives. An alternative to the Gaussian copula is Clayton copula and tstudent copula under importance sampling procedures for simulation which captures the dependence structure between the underlying variables at extreme values and certain values of the input random variables in a simulation have more impact on the parameter being estimated than others .
Item Type:  MPRA Paper 

Original Title:  Copula based simulation procedures for pricing basket Credit Derivatives 
Language:  English 
Keywords:  Collateralized Debt Obligations, Basket Default Swaps, Monte Carlo method, One factor Gaussian copula, Clayton copula, tstudent copula, importance sampling 
Subjects:  G  Financial Economics > G1  General Financial Markets > G19  Other 
Item ID:  6014 
Depositing User:  naifar 
Date Deposited:  29. Nov 2007 13:41 
Last Modified:  11. Feb 2013 16:23 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/6014 