Elliptical and Archimedean copula models: an application to the price estimation of portfolio credit derivatives

Nneka Umeorah, Phillip Mashele and Matthias Ehrhardt

Journal of Credit Risk

Abstract: This paper explores the impact of elliptical and Archimedean copula models on the valuation of basket default swaps. We employ Monte Carlo simulation, in connection with the copula models, to estimate the default times and to calculate the swap payment legs and the cumulative swap premium. The numerical experiments reveal some sensitivity analysis on the impact of swap parameters on the fair prices of the nth-to-default swaps. Finally, using the results presented, an appropriate choice of copula model can be made based on the computation time of the valuation process, and such a choice hugely affects the quantitative risk analysis of the portfolio.

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