Dependent defaults and losses with factor copula models

DOI10.1515/DEMO-2017-0022zbMATH Open1391.60027arXiv1610.03050OpenAlexW3123971464MaRDI QIDQ1648673FDOQ1648673

Authors: Damien Ackerer, Thibault Vatter 

Publication date: 27 June 2018

Published in: Dependence Modeling (Search for Journal in Brave)

Abstract: We present a class of flexible and tractable static factor models for the term structure of joint default probabilities, the factor copula models. These high-dimensional models remain parsimonious with pair-copula constructions, and nest many standard models as special cases. The loss distribution of a portfolio of contingent claims can be exactly and efficiently computed when individual losses are discretely supported on a finite grid. Numerical examples study the key features affecting the loss distribution and multi-name credit derivatives prices. An empirical exercise illustrates the flexibility of our approach by fitting credit index tranche prices.

Full work available at URL: https://arxiv.org/abs/1610.03050

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zbMATH Keywords

discrete Fourier transformsurvival modelscredit derivativescredit portfoliofactor copularandom loss

Mathematics Subject Classification ID

Probability distributions: general theory (60E05) Characteristic functions; other transforms (60E10) Derivative securities (option pricing, hedging, etc.) (91G20) Characterization and structure theory for multivariate probability distributions; copulas (62H05) Measures of association (correlation, canonical correlation, etc.) (62H20) Numerical methods (including Monte Carlo methods) (91G60) Credit risk (91G40) Numerical methods for discrete and fast Fourier transforms (65T50)

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Cited In (25)

• A factor contagion model for portfolio credit derivatives
• CDO pricing with nested Archimedean copulas
• Credit risk dependence modeling with dynamic copula: an application to CDO tranches
• Linear credit risk models
• A remark on credit risk models and copula
• Graphical models for correlated defaults
• Pricing basket default swaps using quasi-analytic techniques
• Title not available (Why is that?)
• Cluster-based extension of the generalized Poisson loss dynamics and consistency with single names
• Modeling defaults with nested Archimedean copulas
• Cross- and Autocorrelation in Multi-Period Credit Portfolio Models
• Joint distributions of portfolio losses and exotic portfolio products
• The crash-NIG factor model
• The skewed t
• Dependent default and recovery: Markov chain Monte Carlo study of downturn loss given default credit risk model
• Factor copula model for portfolio credit risk
• Dynamic credit models
• Max-factor individual risk models with application to credit portfolios
• A factor model for joint default probabilities. Pricing of CDS, index swaps and index tranches
• CIID frailty models and implied copulas
• Joint survival probability via truncated invariant copula
• On the term structure of loss distributions: a forward model approach
• Modeling the dependence of losses of a financial portfolio using nested Archimedean copulas
• A hierarchical copula-based world-wide valuation of sovereign risk
• Tail behaviour of credit loss distributions for general latent factor models

Uses Software

• QRM
• CreditRisk+

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