Basket CDS pricing with interacting intensities. (English) Zbl 1195.91152
A factor contagion model for correlated defaults is proposed. It covers the heterogeneous conditionally independent portfolio and the infectious default portfolio as special cases. This model assumes that some systematic factors affect the default intensities of all names in the portfolio. It is assumed that obligors in the same portfolio have the same default intensity and the contagion rate. For the realization of the proposed idea, the total hazard construction method is applied to find the joint distribution of default times. The ordered default time distribution for homogeneous contagion portfolios is derived, in which connection a recursive algorithm for general portfolio is suggested. The results are extended to the stochastic intensity model and the interacting counterparty default risk model. The analytic results are compared numerically with Monte Carlo results.
Reviewer: Yuliya Mishura (Kyïv)
MSC:
| 91G10 | Portfolio theory |
| 60J75 | Jump processes (MSC2010) |
| 91G60 | Numerical methods (including Monte Carlo methods) |
| 91G20 | Derivative securities (option pricing, hedging, etc.) |
Keywords:
factor contagion model; basket CDS; analytic pricing formula; counterparty risk; stochastic intensityReferences:
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