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Dependent defaults and losses with factor copula models

Author

Listed:
  • Ackerer Damien

    (Swissquote Bank, Gland, Switzerland)

  • Vatter Thibault

    (Department of Statistics, Columbia University, New York, USA)

Abstract

We present a class of flexible and tractable static factor models for the term structure of joint default probabilities, the factor copula models. These high-dimensional models remain parsimonious with paircopula constructions, and nest many standard models as special cases. The loss distribution of a portfolio of contingent claims can be exactly and efficiently computed when individual losses are discretely supported on a finite grid. Numerical examples study the key features affecting the loss distribution and multi-name credit derivatives prices. An empirical exercise illustrates the flexibility of our approach by fitting credit index tranche prices.

Suggested Citation

  • Ackerer Damien & Vatter Thibault, 2017. "Dependent defaults and losses with factor copula models," Dependence Modeling, De Gruyter, vol. 5(1), pages 375-399, December.
    • Handle: RePEc:vrs:demode:v:5:y:2017:i:1:p:375-399:n:22
    DOI: 10.1515/demo-2017-0022
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    References listed on IDEAS

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