Modeling Joint Defaults in Correlation-Sensitive Instruments

28 Pages Posted: 24 Aug 2016

See all articles by Dariusz Gatarek

Dariusz Gatarek

Polish Academy of Sciences

Juliusz Jablecki

University of Warsaw - Faculty of Economic Sciences; National Bank of Poland

Date Written: August 23, 2016

Abstract

This paper presents a simple model for joint defaults and shows how it can be applied to pricing and risk-managing instruments that are sensitive to credit correlation, from simple repos to collateralized debt obligations. The model relies on a conservative and intuitive representation of a systematic factor as a chain of dependencies running through the whole economy. This allows capturing the concentration of defaults in time and endogenously produces dynamics of default correlation as the model output rather than its input.

Keywords: default correlation, Marshall–Olkin, European Financial Stability Facility (EFSF), credit value adjustment (CVA), collateralized debt obligation (CDO)

Suggested Citation

Gatarek, Dariusz and Jablecki, Juliusz, Modeling Joint Defaults in Correlation-Sensitive Instruments (August 23, 2016). Journal of Credit Risk, Vol. 12, No. 3, 2016. Available at SSRN: https://ssrn.com/abstract=2828130

Dariusz Gatarek

Polish Academy of Sciences ( email )

3 Maja str. 2 m 164
Warsaw, 00-391
Poland

Juliusz Jablecki (Contact Author)

University of Warsaw - Faculty of Economic Sciences ( email )

Dluga Street 44/50
Warsaw, 00-241
Poland

National Bank of Poland ( email )

Warsaw
Poland

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