Copula-Based Default Dependence Modelling: Where Do We Stand?

Elisa Luciano

ICER Working Papers - Applied Mathematics Series from ICER - International Centre for Economic Research

Abstract: Copula functions have proven to be extremely useful in describing joint default and survival probabilities in credit risk applications. We overview the state of the art and point out some open modelling issues. We discuss first joint default modelling in diffusion based structural models, then in intensity based ones, focusing on the possibility - and the dynamic inconsistency - of re-mapping a model of the second type into one of the first. For both types of models, we discuss calibration issues under the risk neutral measure, using the factor copula device. The survey leads us to focus on a non-diffusive structural model, which can be re-mapped in a dynamic consistent intensity-based one, and which can be calibrated under a risk neutral measure without assuming equicorrelation.

Keywords: default dependence; copula functions; risk neutral versus historical dependence (search for similar items in EconPapers)
JEL-codes: G12 G32 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2007-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:icr:wpmath:21-2007

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