Credit Risk Modelling with Shot-Noise Processes
25 Pages Posted: 14 Apr 2010
Date Written: April 4, 2010
In this work we study a form of shot-noise processes which is driven by Levy subordinators. The main focus is on applications to portfolios which are subject to credit risk. We show how to augment an arbitrary model for credit risk (e.g. an ane model) with shot-noise processes. This introduceds clustering of defaults into the original model, which is an important model feature highlighted by the current credit crisis.
Keywords: credit portfolio risk, shot-noise processes, default dependence, affine models, local intensities, calibration, CDO
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