Background Filtrations andCanonical Loss Processes for Top-Down Models of Portfolio Credit Risk

Philippe Ehlers and Philipp J. Schoenbucher
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Philippe Ehlers: ETH Zurich, D-MATH
Philipp J. Schoenbucher: ETH Zurich, D-MATH
Authors registered in the RePEc Author Service: Philipp Schönbucher

No 07-07, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: In single-obligor default risk modelling, using a background filtration in conjunction with a suitable embedding hypothesis (generally known as H-hypothesis or immersion property) has proven a very successful tool to separate the actual default event from the model for the default arrival intensity. In this paper we analyze the conditions under which this approach can be extended to the situation of a portfolio of several obligors, with a particular focus on the so-called top-down approach. We introduce the natural H-hypothesis of this setup (the successive H-hypothesis) and show that it is equivalent to a seemingly weaker one-step H-hypothesis. Furthermore, we provide a canonical construction of a loss process in this setup and provide closed-form solutions for some generic pricing problems.

Keywords: credit risk; default correlation; point processes; generalized Cox processes; hypothesis H (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2007-01
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Background filtrations and canonical loss processes for top-down models of portfolio credit risk (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0707

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