An Assessment of Copula Functions Approach in Conjunction with Factor Model in Portfolio Credit Risk Management View Full Text


Ontology type: schema:Chapter     


Chapter Info

DATE

2015

AUTHORS

Lie-Jane Kao , Po-Cheng Wu , Cheng-Few Lee

ABSTRACT

In credit risk modeling, factor models, either static or dynamic, are often used to account for correlated defaults among a set of financial assets. Within the realm of factor models, default dependence is due to a set of common systemic factors. Conditional on these common factors, defaults are independent. The benefit of a factor model is straightforward coupling with a copula function to give an analytic formulation of the joint distribution of default times. However, factor models fail to account for the contagion mechanism of defaults in which a firm’s default risk increases due to their commercial or financial counterparties’ defaults. This study considers a mixture of the dynamic factor model of Duffee (Review of Financial Studies 12, 197–226, 1999) and a contagious effect in the specification of a Hawkes process, a class of counting processes which allows intensities to depend on the timing of previous events (Hawkes. Biometrika 58(1), 83–90, 1971). Using the mixture factor-contagious-effect model, Monte Carlo simulation is performed to generate default times of two hypothesized firms. More... »

PAGES

299-316

References to SciGraph publications

  • 1998-12. On cox processes and credit risky securities in REVIEW OF DERIVATIVES RESEARCH
  • Book

    TITLE

    Handbook of Financial Econometrics and Statistics

    ISBN

    978-1-4614-7749-5
    978-1-4614-7750-1

    Identifiers

    URI

    http://scigraph.springernature.com/pub.10.1007/978-1-4614-7750-1_11

    DOI

    http://dx.doi.org/10.1007/978-1-4614-7750-1_11

    DIMENSIONS

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