Invariance properties in the dynamic Gaussian copula model

DOI10.1051/PROC/201756022MaRDI QIDQ4606383zbMATH OpenOpenAlexFDO

Authors Stéphane Crépey, Shiqi Song

Publication date 7 March 2018

Published in ESAIM: Proceedings and Surveys (Search for Journal in Brave)

Copyright license Creative Commons Attribution-NonCommercial 4.0 International

Full work available at URL https://arxiv.org/abs/1702.03232

zbMATH Keywords

CDScounterparty credit riskdynamic copulaGaussian copulaimmersion propertyinvariance timewrong-way risk

Mathematics Subject Classification ID

Statistics of extreme values; tail inference (62G32) Characterization and structure theory for multivariate probability distributions; copulas (62H05) Applications of statistics to actuarial sciences and financial mathematics (62P05) Credit risk (91G40)

Abstract: We prove that the default times (or any of their minima) in the dynamic Gaussian copula model of Cr{'e}pey, Jeanblanc, and Wu (2013) are invariance times in the sense of Cr{'e}pey and Song (2017), with related invariance probability measures different from the pricing measure. This reflects a departure from the immersion property, whereby the default intensities of the surviving names and therefore the value of credit protection spike at default times. These properties are in line with the wrong-way risk feature of counterparty risk embedded in credit derivatives, i.e. the adverse dependence between the default risk of a counterparty and an underlying credit derivative exposure.

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(5)

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• Invariance times transfer properties
• Joint pricing of default-free and defaultable claims in a reduced-form model featuring a martingale part

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