Default models based on scale mixtures of Marshall-Olkin copulas: properties and applications

German Bernhart (), Marcos Escobar Anel (), Jan-Frederik Mai () and Matthias Scherer ()

Metrika: International Journal for Theoretical and Applied Statistics, 2013, vol. 76, issue 2, 179-203

Abstract: We present a unification of the Archimedean and the Lévy-frailty copula model for portfolio default models. The new default model exhibits a copula known as scale mixture of Marshall-Olkin copulas and an investigation of the dependence structure reveals that desirable properties of both original models are combined. This allows for a wider range of dependence patterns, while the analytical tractability is retained. Furthermore, simultaneous defaults and default clustering are incorporated. In addition, a hierarchical extension is presented which allows for a heterogeneous dependence structure. Finally, the model is applied to the pricing of CDO contracts. For this purpose, an efficient Laplace transform inversion approach is developed. Supporting a separation of marginal default probabilities and dependence structure, the model can be calibrated to CDS contracts in a first step. In a second step, the calibration of several parametric families to CDO contracts demonstrates a good fitting quality, which further emphasizes the suitability of the approach. Copyright Springer-Verlag 2013

Keywords: Portfolio default model; Scale mixture of Marshall-Olkin copulas; Hierarchical copula; Portfolio loss distribution; CDO pricing (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s00184-012-0382-z

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