Pricing Basket Credit Default Swap Based on Mix Copula Functions

Yan-ping Liu (), Jian-hua Liu and Peng Shao
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Yan-ping Liu: Dalian University of Technology
Jian-hua Liu: Dalian University of Technology
Peng Shao: Dalian University of Technology

Chapter Chapter 86 in The 19th International Conference on Industrial Engineering and Engineering Management, 2013, pp 805-813 from Springer

Abstract: Abstract This paper deals with modeling dependence structure of credit risks. The choice of tail dependency structure is important on the pricing of multi-name credit derivatives such as basket credit default swap. An alternative to the Gaussian copula is mix Copula consisting of three types of Archimedean Copulas (Gumbel Copula, Clayton Copula and Frank Copula), which capture fat tail dependence structure between the underlying variables at extreme values. By using Monte Carlo simulation, we find that the tail dependence of mix Copula functions is better than that of normal Gaussian Copula functions. Based on the characteristic of copulas, this paper builds up the pricing model of Basket Credit Default Swap, and creates the pricing framework.

Keywords: Archimedean copula; Basket credit default swaps; Dependence structure; Monte Carlo simulation (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-642-38433-2_86

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DOI: 10.1007/978-3-642-38433-2_86

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