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

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

Authors
Chih-Wei Lee 0, Cheng-Kun Kuo
Corresponding author
Chih-Wei Lee
0National Taipei College of Business
DOI
https://doi.org/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
© The authors. This article is distributed under the terms of the Creative Commons Attribution License 4.0, which permits non-commercial use, distribution and reproduction in any medium, provided the original work is properly cited. See for details: https://creativecommons.org/licenses/by-nc/4.0/
Open Access | Under Creative Commons license CC BY-NC 4.0

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@inproceedings{Lee2006,
  title={A Modification to the Copula Approach for Pricing Correlation-Dependent Credit Derivatives},
  author={Lee, Chih-Wei and Kuo, Cheng-Kun},
  year={2006},
  booktitle={9th Joint International Conference on Information Sciences (JCIS-06)},
  issn={1951-6851},
  isbn={978-90-78677-01-7},
  url={http://dx.doi.org/10.2991/jcis.2006.27},
  doi={10.2991/jcis.2006.27},
  publisher={Atlantis Press}
}
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