Pricing Multiname Credit Derivatives: Heavy Tailed Hybrid Approach

Topics:
Commercial Lending,
Portfolio Management
Tags:
Columbia University,
Defaults,
Derivatives,
Financial Services,
Pricing Strategy
Source:
Columbia University

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Overview: The aim of this paper is to introduce a new methodology for pricing multi-name credit derivatives. Defaults are rare events, and there is little historical data about them. The data about correlated defaults is even scarcer. The implication of not having much historical default data and quotes data is that default models cannot be calibrated using such data, and, therefore, the models and their interpretations are crucial for the estimation of the needed parameters. The paper describes in more detail two instruments. Credit default swaps account for about 40% of the credit derivatives market. It is a financial contract with a specific predetermined maturity between a protection buyer that pays periodical premium to a protection seller. The protection seller stands ready throughout the contract to pay the protection buyer a pre-specified amount at the time the reference name defaults. Upon that payment, the contract ends.

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Format: PDF | Size: 494KB | Date: Jan 2002 | Pages: 28

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