- 922 Downloads
Specifying an appropriate model for dependent defaults is the core problem in valuing CDOs, multi-name credit derivatives and other financial instruments where portfolios of other defaultable financial instruments are present. Different dependence structures produce different default distributions, which in turn affect the pricing of these instruments. They are actively traded which requires a methodology to measure default and market risks on a day-by-day basis. A consistent model for default correlations is essential to price and hedge these instruments.
While the actual loss in a portfolio due to the default of a single obligor may be small (unless the risk exposure is very large) the effects of simultaneous defaults of several issuers can be catastrophic. However, little is known about the drivers of default risk at the portfolio level.
KeywordsCredit Risk Credit Spread Copula Function Default Time Credit Portfolio
Unable to display preview. Download preview PDF.