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Applying a factor copula to value basket credit linked notes with issuer default risk

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  • Wu, Po-Cheng

Abstract

This paper explores a reasonable coupon rate for basket credit linked notes (BCLN) with issuer default risk. Based on the one factor Gaussian copula model, this paper proposes three methods of incorporating issuer default into BCLN pricing. Numerical results indicate that issuer default risk impacts BCLN coupon rate. Furthermore, coupon rate differs with changes in correlation structure among the three methods. One of the three methods is ultimately identified as the most suitable.

Suggested Citation

  • Wu, Po-Cheng, 2010. "Applying a factor copula to value basket credit linked notes with issuer default risk," Finance Research Letters, Elsevier, vol. 7(3), pages 178-183, September.
    • Handle: RePEc:eee:finlet:v:7:y:2010:i:3:p:178-183
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    References listed on IDEAS

    as
    1. Jean-Paul Laurent & Jon Gregory, 2005. "Basket default swaps, CDOs and factor copulas," Post-Print hal-03679517, HAL.
    2. C. H. Hui & C. F. Lo, 2002. "Effect Of Asset Value Correlation On Credit-Linked Note Values," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(05), pages 455-478.
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    Cited by:

    1. Zhang, Xi & Li, Jian, 2018. "Credit and market risks measurement in carbon financing for Chinese banks," Energy Economics, Elsevier, vol. 76(C), pages 549-557.

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