Copulas and dependence models in credit risk: diffusions versus jumps

Elisa Luciano

MPRA Paper from University Library of Munich, Germany

Abstract: The most common approach for default dependence modelling is at present copula functions. Within this framework, the paper examines factor copulas, which are the industry standard, together with their latest development, namely the incorporation of sudden jumps to default instead of a pure diffusive behavior. The impact of jumps on default dependence - through factor copulas - has not been fully explored yet. Our novel contribution consists in showing that modelling default arrival through a pure jump asset process does matter, even when the copula choice is the standard, factor one, and the correlation is calibrated so as to match the diffusive and non diffusive case. An example from the credit derivative market is discussed.

Keywords: credit risk; correlated defaults; structural models; Lévy processes; copula functions; factor copula (search for similar items in EconPapers)
JEL-codes: C10 C30 C60 G13 (search for similar items in EconPapers)
Date: 2006
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Published in Statistica Applicata 4.18(2006): pp. 573-588

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Related works:
Working Paper: Copulas and Dependence models in Credit Risk: Diffusions versus Jumps (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:59638

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