Modelling Dependence for Credit Derivatives with Copulas

23 Pages Posted: 26 Nov 2007

See all articles by Jean-Frédéric Jouanin

Jean-Frédéric Jouanin

affiliation not provided to SSRN

Grégory Rapuch

affiliation not provided to SSRN

Gaël Riboulet

Natixis

Thierry Roncalli

Amundi Asset Management; University of Evry

Date Written: August 25, 2001

Abstract

In this paper, we address the problem of incorporating default dependency in intensity - based credit risk models. Following the works of Li [2000], Giesecke [2001] and Schonbucher and Schubert [2001], we use copulas to model the joint distribution of the default times. Two approaches are considered. The first one consists in modelling the joint survival function directly with survival copulas of default times, whereas in the second approach, copulas are used to correlate the threshold exponential random variables. We compare these two approaches and give some results about their relationships. Then we try some simulations of simple products, such as first - to - defaults. Finally, we discuss the calibration issue according to Moody's diversity score.

Keywords: Copulas, intensity models, Cox processes, Bessel processes, Moody's diversity score

JEL Classification: G00

Suggested Citation

Jouanin, Jean-Frédéric and Rapuch, Grégory and Riboulet, Gaël and Roncalli, Thierry, Modelling Dependence for Credit Derivatives with Copulas (August 25, 2001). Available at SSRN: https://ssrn.com/abstract=1032561 or http://dx.doi.org/10.2139/ssrn.1032561

Jean-Frédéric Jouanin

affiliation not provided to SSRN ( email )

No Address Available

Grégory Rapuch

affiliation not provided to SSRN ( email )

No Address Available

Gaël Riboulet

Natixis ( email )

47 Quai d'Austerlitz
Paris, France 75014
France

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

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