Stochastic evolution equations in portfolio credit modelling with applications to exotic credit products

Nick Bush, Ben M. Hambly, Helen Haworth, Lei Jin and Christoph Reisinger

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Abstract: We consider a structural credit model for a large portfolio of credit risky assets where the correlation is due to a market factor. By considering the large portfolio limit of this system we show the existence of a density process for the asset values. This density evolves according to a stochastic partial differential equation and we establish existence and uniqueness for the solution taking values in a suitable function space. The loss function of the portfolio is then a function of the evolution of this density at the default boundary. We develop numerical methods for pricing and calibration of the model to credit indices and consider its performance pre and post credit crunch. Finally, we give further examples illustrating the valuation of exotic credit products, specifically forward starting CDOs.

Date: 2011-03, Revised 2011-04
New Economics Papers: this item is included in nep-cmp and nep-rmg
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Citations: View citations in EconPapers (3)

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