A factor contagion model for portfolio credit derivatives

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We propose a factor contagion model with the Marshall-Olkin copula for correlated default times and develop an analytic approach for finding the kth default time distribution based on our model. We combine a factor copula model with a contagion model under the assumption that the individual default intensities follow contagion processes, and that the default times have a dependence structure with the Marshall-Olkin copula. Then, we derive an analytic formula for the kth default time distribution and apply it to compute the price of portfolio credit derivatives, such as kth-to-default swaps and single-tranche CDOs. To test efficiency and accuracy of our formula, we compare the theoretical prediction with existing methods.
Publisher
ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD
Issue Date
2015-09
Language
English
Article Type
Article
Citation

QUANTITATIVE FINANCE, v.15, no.9, pp.1571 - 1582

ISSN
1469-7688
DOI
10.1080/14697688.2014.976651
URI
http://hdl.handle.net/10203/205373
Appears in Collection
MA-Journal Papers(저널논문)
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