The kth Default Time Distribution and Basket Default Swap Pricing

Abstract

We propose an alternative method of finding the kth default time distribution in a homogeneous portfolio with dependency. Analyzing order statistics of default times with one factor Gaussian copula model, we explicitly derive probability distribution. Moreover we compute the prices of basket default swaps such as kth to default swaps and m out of n default swaps within our framework. To test efficiency and accuracy of our method we compare the theoretical prediction with some of existing methods.

Keywords: Credit Derivatives, Credit Risk, Copulas, Credit Models, Monte Carlo Method

JEL Classification: C13