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Correlated Defaults

Chapter
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Part of the Springer Finance book series (FINANCE)

Abstract

Default dependencies among many different issuers play an important role in the quantification of a portfolio’s credit risk exposure for many reasons. E.g.:
  • 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.

Keywords

Credit Risk Credit Spread Copula Function Default Time Credit Portfolio 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2004

Authors and Affiliations

  1. 1.risklab germany GmbHMunichGermany

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