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Pricing And Hedging Of Portfolio Credit Derivatives With Interacting Default Intensities

Author

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  • RÜDIGER FREY

    (Department of Mathematics, University of Leipzig, 04009 Leipzig, Germany)

  • JOCHEN BACKHAUS

    (Department of Mathematics, University of Leipzig, 04009 Leipzig, Germany)

Abstract

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.

Suggested Citation

  • Rüdiger Frey & Jochen Backhaus, 2008. "Pricing And Hedging Of Portfolio Credit Derivatives With Interacting Default Intensities," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(06), pages 611-634.
    • Handle: RePEc:wsi:ijtafx:v:11:y:2008:i:06:n:s0219024908004956
    DOI: 10.1142/S0219024908004956
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    References listed on IDEAS

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    1. Herbertsson, Alexander, 2007. "Pricing Synthetic CDO Tranches in a Model with Default Contagion Using the Matrix-Analytic Approach," Working Papers in Economics 270, University of Gothenburg, Department of Economics.
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