A Bottom-Up Dynamic Model of Portfolio Credit Risk. Part I: Markov Copula Perspective

• We consider a bottom-up Markovian copula model of portfolio credit risk where instantaneous contagion is possible in the form of simultaneous defaults. Due to the Markovian copula nature of the model, calibration of marginals and dependence parameters can be performed separately using a two-steps procedure, much like in a standard static copula set-up. In this sense this model solves the bottom-up top-down puzzle which the CDO industry had been trying to do for a long time. It can be applied to any dynamic credit issue like consistent valuation and hedging of CDSs, CDOs and counterparty risk on credit portfolios.

Ämnesord

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business (hsv//eng)

NATURVETENSKAP  -- Matematik -- Sannolikhetsteori och statistik (hsv//swe)

NATURAL SCIENCES  -- Mathematics -- Probability Theory and Statistics (hsv//eng)

NATURVETENSKAP  -- Matematik -- Beräkningsmatematik (hsv//swe)

NATURAL SCIENCES  -- Mathematics -- Computational Mathematics (hsv//eng)

Nyckelord

Portfolio credit risk

Credit derivatives

Markov copula model

Common shocks

Dynamic hedging

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