Correlated Defaults in Intensity-Based Models

24 Pages Posted: 28 Dec 2005

See all articles by Fan Yu

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: November 8, 2005

Abstract

This paper presents an intensity-based model of correlated defaults with application to the valuation of defaultable securities. The model assumes that the intensities of the default times are driven by common factors as well as other defaults in the system. A recursive procedure called the total hazard construction is used to generate default times with a broad class of correlation structures. This approach is compared to standard reduced-form models based on conditional independence as well as alternative approaches involving copula functions. Examples are given for the pricing of defaultable bonds and credit default swaps of the regular and basket type.

Suggested Citation

Yu, Fan, Correlated Defaults in Intensity-Based Models (November 8, 2005). Available at SSRN: https://ssrn.com/abstract=871985 or http://dx.doi.org/10.2139/ssrn.871985

Fan Yu (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

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United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

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