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Copula-Dependent Default Risk In Intensity Models
Year Of Publication: 2001
Month Of Publication: December
Pages: 30
Download Count: 760
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Comment Num: 0
Language: EN
Who Can Read: Free
Date: 12-22-2004
Publisher: Administrator
In this paper we present a new approach to incorporate dynamic defaultdependency in intensity-based default risk models. The model uses anarbitrary default dependency structure which is specified by the Copulaof the times of default, this is combined with individual intensity-basedmodels for the defaults of the obligors without loss of the calibrationof the individual default-intensity models. The dynamics of the survivalprobabilities and credit spreads of individual obligors are derivedand it is shown that in situations with positive dependence, the defaultof one obligor causes the credit spreads of the other obligors to jumpupwards, as it is experienced empirically in situations with credit contagion.For the Clayton copula these jumps are proportional to thepre-default intensity. If information about other obligors is excluded,the model reduces to a standard intensity model for a single obligor,thus greatly facilitating its calibration. To illustrate the results theyare also presented for Archimedean copulae in general, and Gumbeland Clayton copulae in particular. Furthermore it is shown how the defaultcorrelation can be calibrated to a Gaussian dependency structureof CreditMetrics-type.
Schonbucher, Philipp J. Sign in to follow this author
Schubert, Dirk Sign in to follow this author
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