On Some Inconsistencies in Modelling Credit Portfolio Products

Tunaru, R. and Fabozzi, F. (2007) On Some Inconsistencies in Modelling Credit Portfolio Products. International Journal of Theoretical and Applied Finance, 10 (8). pp. 1305-1321. ISSN 0219-0249. (The full text of this publication is not available from this repository)

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Official URL
http://dx.doi.org/10.1142/S0219024907004664

Abstract

The survival probability term structure has become the main concept in modeling credit risk for pricing, risk management, and investment decisions. The Kth-to-default contract is not only a relatively liquid credit risk instrument but also a vehicle that credit rating agencies employ to determine the rating of more esoteric credit risky positions. In this paper, we point out some subtleties in credit risk modeling of default baskets and also identify some potential bias in the pricing formula of the Kth-to-default contract. The numerical examples suggest that this bias increases with the correlation. The results in this paper emphasize the important role of conditioning the information regarding arrival of default.

Item Type: Article
Uncontrolled keywords: Credit risk modeling; credit default swap; survival probability curve; Kth-to-default; conditional probability
Subjects: H Social Sciences > H Social Sciences (General)
Divisions: Faculties > Social Sciences > Kent Business School > Accounting and Finance
Depositing User: Jennifer Knapp
Date Deposited: 19 Jul 2010 10:14
Last Modified: 10 Jan 2012 16:29
Resource URI: http://kar.kent.ac.uk/id/eprint/25100 (The current URI for this page, for reference purposes)
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