Compensator-based simulation of correlated defaults

Arbeitspapier

The market for derivatives with payoffs contingent on the credit quality of a number of reference entities has grown considerably over recent years. The risk analysis and valuation of such multi-name structures often relies on simulating the performance of the underlying credits. In this paper we discuss the simulation of correlated unpredictable default arrival times. Our algorithm is based on the compensator of default. We construct this compensator explicitly in a multi-firm structural model with correlated defaults and imperfect asset and default threshold observation. It is shown how the model parameters can be estimated from readily available equity and single-name credit derivatives market data.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 373 Discussion Paper ; No. 2002,47

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates ; Contingent Pricing; Futures Pricing; option pricing
• Subject: simulation ; correlated defaults ; default compensator

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Giesecke, Kay
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes
• (where): Berlin
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/65338
• URN: urn:nbn:de:kobv:11-10051468
• Last update: 10.03.2025, 11:45 AM CET