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Correlation Structures of Correlated Binomial Models and Implied Default Distribution

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  • S. Mori
  • K. Kitsukawa
  • M. Hisakado

Abstract

We show how to analyze and interpret the correlation structures, the conditional expectation values and correlation coefficients of exchangeable Bernoulli random variables. We study implied default distributions for the iTraxx-CJ tranches and some popular probabilistic models, including the Gaussian copula model, Beta binomial distribution model and long-range Ising model. We interpret the differences in their profiles in terms of the correlation structures. The implied default distribution has singular correlation structures, reflecting the credit market implications. We point out two possible origins of the singular behavior.

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  • S. Mori & K. Kitsukawa & M. Hisakado, 2006. "Correlation Structures of Correlated Binomial Models and Implied Default Distribution," Papers physics/0609093, arXiv.org, revised Sep 2008.
    • Handle: RePEc:arx:papers:physics/0609093
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    Cited by:

    1. S. Mori & K. Kitsukawa & M. Hisakado, 2006. "Moody's Correlated Binomial Default Distributions for Inhomogeneous Portfolios," Papers physics/0603036, arXiv.org, revised Oct 2009.
    2. Masato Hisakado & Kodai Hattori & Shintaro Mori, 2022. "Multi-dimensional Self-Exciting NBD Process and Default Portfolios," The Review of Socionetwork Strategies, Springer, vol. 16(2), pages 493-512, October.
    3. Lee, Sangwook & Kim, Min Jae & Lee, Sun Young & Kim, Soo Yong & Ban, Joon Hwa, 2013. "The effect of the subprime crisis on the credit risk in global scale," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(9), pages 2060-2071.

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