Default Correlation, Cluster Dynamics and Single Names: The GPCL Dynamical Loss Model

35 Pages Posted: 14 Jan 2007

See all articles by Damiano Brigo

Damiano Brigo

Imperial College London - Department of Mathematics

Andrea Pallavicini

Banca IMI; Imperial College London - Department of Mathematics

Roberto Torresetti

Banco Popolare

Date Written: January 12, 2007

Abstract

We extend the common Poisson shock framework reviewed for example in Lindskog and McNeil (2003) to a formulation avoiding repeated defaults, thus obtaining a model that can account consistently for single name default dynamics, cluster default dynamics and default counting process. This approach allows one to introduce significant dynamics, improving on the standard bottom-up approaches, and to achieve true consistency with single names, improving on most top-down loss models. Furthermore, the resulting GPCL model has important links with the previous GPL dynamical loss model in Brigo, Pallavicini and Torresetti (2006a,b), which we point out. Model extensions allowing for more articulated spread and recovery dynamics are hinted at. Calibration to both DJi-TRAXX and CDX index and tranche data across attachments and maturities shows that the GPCL model has the same calibration power as the GPL model while allowing for consistency with single names.

Keywords: Loss Distribution, Loss Dynamics, Single Name Default Dynamics, Cluster Default Dynamics, Calibration, Generalized Poisson Process, Stochastic Intensity, Spread Dynamics, Common Poisson Shock Models

JEL Classification: G13

Suggested Citation

Brigo, Damiano and Pallavicini, Andrea and Torresetti, Roberto, Default Correlation, Cluster Dynamics and Single Names: The GPCL Dynamical Loss Model (January 12, 2007). Available at SSRN: https://ssrn.com/abstract=956827 or http://dx.doi.org/10.2139/ssrn.956827

Damiano Brigo

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.imperial.ac.uk/people/damiano.brigo

Andrea Pallavicini (Contact Author)

Banca IMI ( email )

Largo Mattioli 3
Milan, MI 20121
Italy
+39 02 7261 (Phone)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom

Roberto Torresetti

Banco Popolare ( email )

Milan
Italy

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