CLUSTER-BASED EXTENSION OF THE GENERALIZED POISSON LOSS DYNAMICS AND CONSISTENCY WITH SINGLE NAMES

Damiano Brigo, Andrea Pallavicini and Roberto Torresetti
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Roberto Torresetti: Credit Models Banca IMI, Corso Matteotti 6, 20121 Milano, Italy

Chapter 2 in Credit Correlation:Life After Copulas, 2007, pp 15-39 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe extend the common Poisson shock framework reviewed for example in Lindskog and McNeil [15] to a formulation avoiding repeated defaults, thus obtaining a model that can account consistently for single name default dynamics, cluster default dynamics and default counting process. This approach allows one to introduce significant dynamics, improving on the standard “bottom-up” approaches, and to achieve true consistency with single names, improving on most “top-down” loss models. Furthermore, the resulting GPCL model has important links with the previous GPL dynamical loss model in Brigo et al. [6], which we point out. Model extensions allowing for more articulated spread and recovery dynamics are hinted at. Calibration to both D Ji-TRAXX and CDX index and tranche data across attachments and maturities shows that the GPCL model has the same calibration power as the GPL model while allowing for consistency with single names.

Keywords: Credit Derivatives; Gaussian Copulas; Tranches; Credit Baskets; Base Correlations (search for similar items in EconPapers)
Date: 2007
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Journal Article: CLUSTER-BASED EXTENSION OF THE GENERALIZED POISSON LOSS DYNAMICS AND CONSISTENCY WITH SINGLE NAMES (2007)
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