Dependent Defaults and Losses with Factor Copula Models

Damien Ackerer and Thibault Vatter
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Damien Ackerer: Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute
Thibault Vatter: Ecole Polytechnique Fédérale de Lausanne and University of Lausanne

No 16-59, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We introduce a class of flexible and tractable static factor models for the joint term structure of default probabilities, the factor copula models. These high dimensional models remain parsimonious with pair copula constructions, and nest numerous standard models as special cases. With finitely supported random losses, the loss distributions of credit portfolios and derivatives can be exactly and efficiently computed. Numerical examples on collateral debt obligation (CDO), CDO squared, and credit index swaption illustrate the versatility of our framework. An empirical exercise shows that a simple model specification can fit credit index tranche prices.

Keywords: credit portfolio; credit derivatives; discrete Fourier transform; factor copula; random loss; survival models (search for similar items in EconPapers)
JEL-codes: C10 G12 G13 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2016-10
New Economics Papers: this item is included in nep-rmg and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1659

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