IDEAS home Printed from https://ideas.repec.org/h/wsi/wschap/9789812709509_0006.html
   My bibliography  Save this book chapter

Pricing And Hedging In A Dynamic Credit Model

In: Credit Correlation Life After Copulas

Author

Listed:
  • YOUSSEF ELOUERKHAOUI

    (CITIGROUP, Canada Square, Canary Wharf, London E14 5LB, United Kingdom)

Abstract

In this paper, we present a methodology for pricing and hedging portfolio credit derivatives in a dynamic credit model. Starting with a single-name Marshall–Olkin framework, we build a dynamic top-down version of the model, which is tractable and preserves the intuition of the original setting. In the first part of the paper, we derive analytically the Fourier transform of the loss variable and we study the skew dynamics implied by the model. In the second part, we develop a theory for dynamic hedging of portfolio credit derivatives. Since the market is incomplete, due to the residual correlation risk, perfect replication cannot be achieved. To find the hedging strategies, we use a quadratic risk minimization criterion.

Suggested Citation

  • Youssef Elouerkhaoui, 2007. "Pricing And Hedging In A Dynamic Credit Model," World Scientific Book Chapters, in: Alexander Lipton & Andrew Rennie (ed.), Credit Correlation Life After Copulas, chapter 6, pages 111-139, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812709509_0006
    as

    Download full text from publisher

    File URL: https://www.worldscientific.com/doi/pdf/10.1142/9789812709509_0006
    Download Restriction: Ebook Access is available upon purchase.
    File URL: https://www.worldscientific.com/doi/abs/10.1142/9789812709509_0006
    Download Restriction: Ebook Access is available upon purchase.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Albanese Claudio & Armenti Yannick & Crépey Stéphane, 2020. "XVA metrics for CCP optimization," Statistics & Risk Modeling, De Gruyter, vol. 37(1-2), pages 25-53, January.
    2. Sabrina Mulinacci, 2017. "A systemic shock model for too big to fail financial institutions," Papers 1704.02160, arXiv.org, revised Apr 2017.
    3. Matthias Scherer & Henrik Sloot, 2019. "Exogenous shock models: analytical characterization and probabilistic construction," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 82(8), pages 931-959, November.
    4. Sabrina Mulinacci, 2022. "A Marshall-Olkin Type Multivariate Model with Underlying Dependent Shocks," Methodology and Computing in Applied Probability, Springer, vol. 24(4), pages 2455-2484, December.
    5. Lokman A. Abbas-Turki & Stéphane Crépey & Babacar Diallo, 2018. "Xva Principles, Nested Monte Carlo Strategies, And Gpu Optimizations," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(06), pages 1-40, September.
    6. Claudio Albanese & Stéphane Crépey & Rodney Hoskinson & Bouazza Saadeddine, 2021. "XVA analysis from the balance sheet," Quantitative Finance, Taylor & Francis Journals, vol. 21(1), pages 99-123, January.
    7. Tomasz R. Bielecki & Areski Cousin & Stéphane Crépey & Alexander Herbertsson, 2014. "Dynamic Hedging of Portfolio Credit Risk in a Markov Copula Model," Journal of Optimization Theory and Applications, Springer, vol. 161(1), pages 90-102, April.
    8. David Barrera & Stéphane Crépey & Babacar Diallo & Gersende Fort & Emmanuel Gobet & Uladzislau Stazhynski, 2018. "Stochastic Approximation Schemes for Economic Capital and Risk Margin Computations," Working Papers hal-01710394, HAL.
    9. David Barrera & Stéphane Crépey & Babacar Diallo & Gersende Fort & Emmanuel Gobet & Uladzislau Stazhynski, 2019. "Stochastic Approximation Schemes for Economic Capital and Risk Margin Computations," Post-Print hal-01710394, HAL.
    10. Bielecki, Tomasz R. & Cousin, Areski & Crépey, Stéphane & Herbertsson, Alexander, 2011. "Dynamic Hedging of Portfolio Credit Risk in a Markov Copula Model (Previous title: Dynamic Modeling of Portfolio Credit Risk with Common Shocks)," Working Papers in Economics 502, University of Gothenburg, Department of Economics, revised 12 Oct 2012.
    11. Bielecki, T.R. & Cousin, A. & Crépey, S. & Herbertsson, Alexander, 2012. "A Markov Copula Model of Portfolio Credit Risk with Stochastic Intensities and Random Recoveries," Working Papers in Economics 545, University of Gothenburg, Department of Economics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:wschap:9789812709509_0006. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.