A Semi-Analytical Parametric Model for Dependent Defaults

B S Balakrishna

MPRA Paper from University Library of Munich, Germany

Abstract: A semi-analytical parametric approach to modeling default dependency is presented. It is a multi-factor model based on instantaneous default correlation that also takes into account higher order default correlations. It is capable of accommodating a term structure of default correlations and has a dynamic formulation in the form of a continuous time Markov chain. With two factors and a constant hazard rate, it provides perfect fits to four tranches of CDX.NA.IG and iTraxx Europe CDOs of 5, 7 and 10 year maturities. With time dependent hazard rates, it provides perfect fits to all the five tranches for all three maturities.

Keywords: Default Risk; Default Correlation; CDO; Markov Chain; Semi-analytical; Parametric (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2006-08-16, Revised 2007-05-15
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:14918

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