Efficient algorithms for basket default swap pricing with multivariate Archimedean copulas

Geon Ho Choe and Hyun Jin Jang

Insurance: Mathematics and Economics, 2011, vol. 48, issue 2, 205-213

Abstract: We introduce a new importance sampling method for pricing basket default swaps employing exchangeable Archimedean copulas and nested Gumbel copulas. We establish more realistic dependence structures than existing copula models for credit risks in the underlying portfolio, and propose an appropriate density for importance sampling by analyzing multivariate Archimedean copulas. To justify efficiency and accuracy of the proposed algorithms, we present numerical examples and compare them with the crude Monte Carlo simulation, and finally show that our proposed estimators produce considerably smaller variances.

Keywords: Credit; risk; Archimedean; copula; Nested; Archimedean; copula; Basket; default; swap; Importance; sampling (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:48:y:2011:i:2:p:205-213

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