Pricing and hedging of portfolio credit derivatives with interacting default intensities. (English) Zbl 1210.91130
Summary: We consider reduced-form models for portfolio credit risk with interacting default intensities. In this class of models default intensities are modeled as functions of time and of the default state of the entire portfolio, so that phenomena such as default contagion or counterparty risk can be modeled explicitly. In the present paper this class of models is analyzed by Markov process techniques. We study in detail the pricing and the hedging of portfolio-related credit derivatives such as basket default swaps and collaterized debt obligations (CDOs) and discuss the calibration to market data.
MSC:
| 91G20 | Derivative securities (option pricing, hedging, etc.) |
| 91G40 | Credit risk |
| 60J20 | Applications of Markov chains and discrete-time Markov processes on general state spaces (social mobility, learning theory, industrial processes, etc.) |
Software:
QRMReferences:
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