The Mathematical Institute, University of Oxford, Eprints Archive

Modeling basket credit default swaps with default contagion

Haworth, Helen and Reisinger, Christoph (2006) Modeling basket credit default swaps with default contagion. Journal of Credit Risk . (Submitted)

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Abstract

The specification of a realistic dependence structure is key to the pricing of multi-name credit derivatives. We value small kth-to-default CDS baskets in the presence of asset correlation and default contagion. Using a first-passage framework, firm values are modeled as correlated geometric Brownian motions with exponential default thresholds. Idiosyncratic links between companies are incorporated through a contagion mechanism whereby a default event leads to jumps in volatility at related entities. Our framework allows for default causality and is extremely flexible, enabling us to evaluate the spread impact of firm value correlations and credit contagion for symmetric and asymmetric baskets.

Item Type:Article
Uncontrolled Keywords:Basket credit default swaps, default dependence, credit risk, correlation, contagion, firstpassage model
Subjects:O - Z > Partial differential equations
O - Z > Probability theory and stochastic processes
H - N > Numerical analysis
Research Groups:Oxford Centre for Industrial and Applied Mathematics
Mathematical and Computational Finance Group
ID Code:561
Deposited By:Christoph Reisinger
Deposited On:12 Jan 2007
Last Modified:20 Jul 2009 14:22

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