A Modification to the Copula Approach for Pricing Correlation-Dependent Credit Derivatives

DOI

10.2991/jcis.2006.27How to use a DOI?

Keywords

copula, default correlation

Abstract

This paper proposes a modified copula approach to defining correlation dependence used for pricing credit derivatives. For both single-name and multiname products, how default correlations react to common shocks should be appropriately measured. The copula approach is an effective method for this purpose. However, in the currently available copula models, usually positive default correlations are allowed, or are relatively easy to implement. Consequently, these models may not provide sufficient information for pricing credit derivatives with mutually dependent defaults. In this paper, we explicitly define a default correlation structure that allows opposite response to a common factor. Using an exponential copula model as illustration, we show the modification is a more comprehensive description of default dependence found in market.

Copyright

© 2006, the Authors. Published by Atlantis Press.

Open Access

This is an open access article distributed under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).

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TY  - CONF
AU  - Chih-Wei Lee
AU  - Cheng-Kun Kuo
PY  - 2006/10
DA  - 2006/10
TI  - A Modification to the Copula Approach for Pricing Correlation-Dependent Credit Derivatives
BT  - Proceedings of the 9th Joint International Conference on Information Sciences (JCIS-06)
PB  - Atlantis Press
SP  - 113
EP  - 116
SN  - 1951-6851
UR  - https://doi.org/10.2991/jcis.2006.27
DO  - 10.2991/jcis.2006.27
ID  - Lee2006/10
ER  -