IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1006.2012.html
   My bibliography  Save this paper

Discrete tenor models for credit risky portfolios driven by time-inhomogeneous L\'evy processes

Author

Listed:
  • Ernst Eberlein
  • Zorana Grbac
  • Thorsten Schmidt

Abstract

The goal of this paper is to specify dynamic term structure models with discrete tenor structure for credit portfolios in a top-down setting driven by time-inhomogeneous L\'evy processes. We provide a new framework, conditions for absence of arbitrage, explicit examples, an affine setup which includes contagion and pricing formulas for STCDOs and options on STCDOs. A calibration to iTraxx data with an extended Kalman filter shows an excellent fit over the full observation period. The calibration is done on a set of CDO tranche spreads ranging across six tranches and three maturities.

Suggested Citation

  • Ernst Eberlein & Zorana Grbac & Thorsten Schmidt, 2010. "Discrete tenor models for credit risky portfolios driven by time-inhomogeneous L\'evy processes," Papers 1006.2012, arXiv.org, revised Apr 2013.
    • Handle: RePEc:arx:papers:1006.2012
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1006.2012
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jakob Sidenius & Vladimir Piterbarg & Leif Andersen, 2008. "A New Framework For Dynamic Credit Portfolio Loss Modelling," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(02), pages 163-197.
    2. Philippe Ehlers & Philipp Schönbucher, 2009. "Background filtrations and canonical loss processes for top-down models of portfolio credit risk," Finance and Stochastics, Springer, vol. 13(1), pages 79-103, January.
    3. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," The Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    4. Ernst Eberlein & Antonis Papapantoleon & Albert N. Shiryaev, 2008. "Esscher transform and the duality principle for multidimensional semimartingales," Papers 0809.0301, arXiv.org, revised Nov 2009.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    1. Roman V. Ivanov, 2018. "A Credit-Risk Valuation under the Variance-Gamma Asset Return," Risks, MDPI, vol. 6(2), pages 1-25, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nicole El Karoui & Monique Jeanblanc & Ying Jiao, 2017. "Dynamics of multivariate default system in random environment," Post-Print hal-01205753, HAL.
    2. El Karoui, Nicole & Jeanblanc, Monique & Jiao, Ying, 2017. "Dynamics of multivariate default system in random environment," Stochastic Processes and their Applications, Elsevier, vol. 127(12), pages 3943-3965.
    3. Biagini, Francesca & Mazzon, Andrea & Oberpriller, Katharina, 2023. "Reduced-form framework for multiple ordered default times under model uncertainty," Stochastic Processes and their Applications, Elsevier, vol. 156(C), pages 1-43.
    4. Dufrénot, Gilles & Gente, Karine & Monsia, Frédia, 2016. "Macroeconomic imbalances, financial stress and fiscal vulnerability in the euro area before the debt crises: A market view," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 123-146.
    5. Alain Monfort & Jean-Paul Renne, 2013. "Default, Liquidity, and Crises: an Econometric Framework," Journal of Financial Econometrics, Oxford University Press, vol. 11(2), pages 221-262, March.
    6. de Andrade, Fabio Wendling Muniz & Thomas, Lyn, 2007. "Structural models in consumer credit," European Journal of Operational Research, Elsevier, vol. 183(3), pages 1569-1581, December.
    7. Lily Y. Liu, 2017. "Estimating Loss Given Default from CDS under Weak Identification," Supervisory Research and Analysis Working Papers RPA 17-1, Federal Reserve Bank of Boston.
    8. Chamizo, Álvaro & Novales, Alfonso, 2021. "Evaluation of market risk associated with hedging a credit derivative portfolio," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 411-430.
    9. Xiao, Tim, 2012. "An Economic Examination of Collateralization in Different Financial Markets," MPRA Paper 47105, University Library of Munich, Germany.
    10. Pesaran, M. Hashem & Schuermann, Til & Treutler, Bjorn-Jakob & Weiner, Scott M., 2006. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1211-1261, August.
    11. Francois, Pascal & Hubner, Georges, 2004. "Credit derivatives with multiple debt issues," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 997-1021, May.
    12. Kim Oosterlinck & Loredana Ureche-Rangau, 2004. "Entre la peste et le choléra: le détenteur d'obligations peut préférer la répudiation au défaut," Working Papers CEB 04-021.RS, ULB -- Universite Libre de Bruxelles.
    13. A. Itkin & V. Shcherbakov & A. Veygman, 2019. "New Model For Pricing Quanto Credit Default Swaps," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(03), pages 1-37, May.
    14. Marco Matsumara & Ajax R.B. Moreira, 2005. "Can Macroeconomic Variables Account for the Term Structure of Sovereign Spreads? Studying the Brazilian Case," Discussion Papers 1106, Instituto de Pesquisa Econômica Aplicada - IPEA.
    15. Samson Assefa, 2007. "Pricing Swaptions and Credit Default Swaptions in the Quadratic Gaussian Factor Model," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 31, July-Dece.
    16. Marra, Miriam, 2015. "The impact of liquidity on senior credit index spreads during the subprime crisis," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 148-167.
    17. Pascal François, 2019. "The Determinants of Market-Implied Recovery Rates," Risks, MDPI, vol. 7(2), pages 1-15, May.
    18. Giampaolo Gabbi & Andrea Sironi, 2005. "Which factors affect corporate bonds pricing? Empirical evidence from eurobonds primary market spreads," The European Journal of Finance, Taylor & Francis Journals, vol. 11(1), pages 59-74.
    19. Benbouzid, Nadia & Leonida, Leone & Mallick, Sushanta K., 2018. "The non-monotonic impact of bank size on their default swap spreads: Cross-country evidence," International Review of Financial Analysis, Elsevier, vol. 55(C), pages 226-240.
    20. Jarrow, Robert & Li, Haitao & Liu, Sheen & Wu, Chunchi, 2010. "Reduced-form valuation of callable corporate bonds: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 95(2), pages 227-248, February.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    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:arx:papers:1006.2012. 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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    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.