Proceedings of the 9th Joint International Conference on Information Sciences (JCIS-06)

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

Authors
Chih-Wei Lee1, Cheng-Kun Kuo
1National Taipei College of Business
Corresponding Author
Chih-Wei Lee
Available Online October 2006.
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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Volume Title
Proceedings of the 9th Joint International Conference on Information Sciences (JCIS-06)
Series
Advances in Intelligent Systems Research
Publication Date
October 2006
ISBN
978-90-78677-01-7
ISSN
1951-6851
DOI
10.2991/jcis.2006.27How to use a DOI?
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/).

Cite this article

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  -