PRICING AND HEDGING OF PORTFOLIO CREDIT DERIVATIVES WITH INTERACTING DEFAULT INTENSITIES

Rüdiger Frey () and Jochen Backhaus ()
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Rüdiger Frey: Department of Mathematics, University of Leipzig, 04009 Leipzig, Germany
Jochen Backhaus: Department of Mathematics, University of Leipzig, 04009 Leipzig, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2008, vol. 11, issue 06, 611-634

Abstract: We consider reduced-form models for portfolio credit risk with interacting default intensities. In this class of models default intensities are modeled as functions of time and of the default state of the entire portfolio, so that phenomena such as default contagion or counterparty risk can be modeled explicitly. In the present paper this class of models is analyzed by Markov process techniques. We study in detail the pricing and the hedging of portfolio-related credit derivatives such as basket default swaps and collaterized debt obligations (CDOs) and discuss the calibration to market data.

Keywords: Credit derivatives; CDOs; hedging; Markov chains (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (26)

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DOI: 10.1142/S0219024908004956

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