Regime-Switching Extension of the NIG Factor Copula Model

Anna Schlösser ()
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Anna Schlösser: Hedging and Derivatives Strategies

Chapter Chapter 8 in Pricing and Risk Management of Synthetic CDOs, 2011, pp 185-226 from Springer

Abstract: Abstract The large homogeneous cell extension of the NIG factor copula model was intro- duced and investigated in the previous chapter. With this extension the number of parameters is increased from two to six: ? and five correlation parameters for the rating classes AAA, AA, A, BBB and BB. Issuers with a rating lower than BB have not been observed in the iTraxx portfolios so far. Still we do not believe to be able to achieve a good fit of the complete history of the iTraxx prices with this model with the correlation parameters constant over time. During only the last 4 years when the iTraxx tranches were traded, different correlation regimes were observed. Very high correlations are observed during the current sup-prime crisis. The year before the crisis in July 2007 began, the correlation was in contrast very low. For this rea- son, an extension of the NIG factor copula model allowing for different correlation regimes is expected to better reflect the reality than the model with the constant correlation.

Keywords: Hide Markov Model; Time Segment; Default Probability; Credit Spread; Copula Model (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1007/978-3-642-15609-0_8

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