A dynamic default dependence model

Sara Cecchetti () and Giovanna Nappo ()
Additional contact information
Sara Cecchetti: Bank of Italy
Giovanna Nappo: Sapienza, University of Rome

No 892, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We develop a dynamic multivariate default model for a portfolio of credit-risky assets in which default times are modelled as random variables with possibly different marginal distributions, and L�vy subordinators are used to model the dependence among default times. In particular, we define a cumulative dynamic hazard process as a L�vy subordinator, which allows for jumps and induces positive probabilities of joint defaults. We allow the main asset classes in the portfolio to have different cumulative default probabilities and corresponding different cumulative hazard processes. Under this heterogeneous assumption we compute the portfolio loss distribution in closed form. Using an approximation of the loss distribution, we calibrate the model to the tranches of the iTraxx Europe. Once the multivariate default distribution has been estimated, we analyse the distress dependence in the portfolio by computing indicators of systemic risk, such as the Stability Index, the Distress Dependence Matrix and the Probability of Cascade Effects.

Keywords: L�vy subordinators; joint default probability; copula (search for similar items in EconPapers)
JEL-codes: B26 C02 C53 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.bancaditalia.it/pubblicazioni/temi-disc ... 0892/en_tema_892.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_892_12

Access Statistics for this paper

More papers in Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area Contact information at EDIRC.
Bibliographic data for series maintained by ().