A factor contagion model for portfolio credit derivatives

We propose a factor contagion model with the Marshall-Olkin copula for correlated default times and develop an analytic approach for finding the th default time distribution based on our model. We combine a factor copula model with a contagion model under the assumption that the individual default i...

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Bibliographic Details
Published in:Quantitative finance 2015-09, Vol.15 (9), p.1571-1582
Main Authors: Choe, Geon Ho, Jang, Hyun Jin, Kwon, Soon Won
Format: Article
Language:English
Subjects:
Collateralized debt obligations
Contagion model
Correlation analysis
Credit derivatives
Default
Derivatives
Marshall-Olkin copula
Mathematical models
Probability distribution
Recovery rate
Studies
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Summary:We propose a factor contagion model with the Marshall-Olkin copula for correlated default times and develop an analytic approach for finding the th 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 th default time distribution and apply it to compute the price of portfolio credit derivatives, such as th-to-default swaps and single-tranche CDOs. To test efficiency and accuracy of our formula, we compare the theoretical prediction with existing methods.
ISSN:1469-7688
1469-7696
DOI:10.1080/14697688.2014.976651