Dependence properties of dynamic credit risk models

Bäuerle Nicole and Schmock Uwe
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Schmock Uwe: Institute for Mathematical Methods in Economics, Vienna University of Technology, Vienne, Österreich

Statistics & Risk Modeling, 2012, vol. 29, issue 3, 243-268

Abstract: We give a unified mathematical framework for reduced-form models for portfolio credit risk and identify properties which lead to positive dependence of default times. Dependence in the default hazard rates is modeled by common macroeconomic factors as well as by inter-obligor links. It is shown that popular models produce positive dependence between defaults in terms of association. Implications of these results are discussed, in particular when we turn to pricing of credit derivatives. In mathematical terms our paper contains results about association of a class of non-Markovian processes.

Keywords: portfolio credit risk; hazard rate model; reduced-form model; copula; association (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1524/strm.2012.1101

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