Dependent Defaults and Losses with Factor Copula Models

Dependence Modeling, Volume 5, Issue 1, Pages 375-399, 2017

Swiss Finance Institute Research Paper No. 16-59

29 Pages Posted: 17 Oct 2016 Last revised: 14 Jun 2019

See all articles by Damien Ackerer

Damien Ackerer

École Polytechnique Fédérale de Lausanne

Thibault Vatter

Columbia University - Departments of Statistics and Mathematics; University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Date Written: December 22, 2017

Abstract

We present a class of flexible and tractable static factor models for the term structure of joint default probabilities, the factor copula models. These high-dimensional models remain parsimonious with pair-copula constructions, and nest many standard models as special cases. The loss distribution of a portfolio of contingent claims can be exactly and efficiently computed when individual losses are discretely supported on a finite grid. Numerical examples study the key features affecting the loss distribution and multi-name credit derivatives prices. An empirical exercise illustrates the flexibility of our approach by fitting credit index tranche prices.

Keywords: credit portfolio, credit derivatives, discrete Fourier transform, factor copula, random loss, survival models

JEL Classification: C10, G12, G13

Suggested Citation

Ackerer, Damien and Vatter, Thibault, Dependent Defaults and Losses with Factor Copula Models (December 22, 2017). Dependence Modeling, Volume 5, Issue 1, Pages 375-399, 2017, Swiss Finance Institute Research Paper No. 16-59, Available at SSRN: https://ssrn.com/abstract=2853284 or http://dx.doi.org/10.2139/ssrn.2853284

Damien Ackerer (Contact Author)

École Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny
Lausanne, CH-1015
Switzerland

Thibault Vatter

Columbia University - Departments of Statistics and Mathematics ( email )

1255 Amsterdam Avenue
New York, NY 10027
United States

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Lausanne, 1015
Switzerland

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