Dependent defaults and losses with factor copula models

Ackerer Damien () and Vatter Thibault ()
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Ackerer Damien: Swissquote Bank, Gland, Switzerland
Vatter Thibault: Department of Statistics, Columbia University, New York, USA

Dependence Modeling, 2017, vol. 5, issue 1, 375-399

Abstract: We present a class of flexible and tractable static factor models for the term structure of joint default probabilities, the factor copula models. These high-dimensional models remain parsimonious with paircopula constructions, and nest many standard models as special cases. The loss distribution of a portfolio of contingent claims can be exactly and efficiently computed when individual losses are discretely supported on a finite grid. Numerical examples study the key features affecting the loss distribution and multi-name credit derivatives prices. An empirical exercise illustrates the flexibility of our approach by fitting credit index tranche prices.

Keywords: credit portfolio; credit derivatives; discrete Fourier transform; factor copula; random loss; survival models (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:demode:v:5:y:2017:i:1:p:375-399:n:22

DOI: 10.1515/demo-2017-0022

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