We study the implied default distributions for the iTraxx-CJ tranches by means of the Principle of Maximum Entropy. The profiles are quite different from those of some popular probabilistic models. We show how to analyze the correlation structures, the conditional default probabilities pi,j and conditional default correlations ρi,j . Here the subscript i,j means that the default probability and...

In this paper, under the reduced form framework and “Bottom Up” method, a model for pricing a basket Loan-only Credit Default Swap (LCDS), with the negative correlation between prepayment and default, is established. A general pricing formula for it is obtained, where one factor CIR (Cox-Ingersoll-Ross) and ICIR (Inversed CIR) models are used to describe the negative correlation between prepaym...

This paper examines one of the major problems in credit risk models widely used in the financial industry to forecast future defaults and bankruptcies. We find that even after proper calibration, a representative credit risk model can severely underestimate default correlation. We further find that a likely reason for the underestimation of default correlation is the problematic common practice...

Common Failings: How Corporate Defaults are Correlated We develop, and apply to data on U.S. corporations from 1987-2000, tests of the standard doubly-stochastic assumption under which firms’ default times are correlated only as implied by the correlation of factors determining their default intensities. This assumption is violated in the presence of contagion or “frailty” (unobservable covaria...

Using the reduced form framework with inter-dependent default correlation, we perform valuation of credit default swap with counterparty risk. The inter-dependent default risk structure between the protection buyer, protection seller and the reference entity in a credit default swap are characterized by their correlated default intensities, where the default intensity of one party increases whe...

Asset correlation is a critical driver in modeling portfolio credit risk. Despite its importance, there have been few studies on the empirical relationship between asset correlation and subsequently realized default correlation, and portfolio credit risk. This three three-way relationship is the focus of our study using U.S. public firm default data from 1981 to 2006. We find the magnitude of d...

Reduced-form models have proven to be a useful tool for analyzing the dynamics of credit spreads. However, some have recently questioned their ability to match the level of empirical default correlation. The key concern appears to be the assumption that defaults are independent conditional on the state variables driving the default intensity. In this paper, I use a “thought experiment” as well ...

The modelling of credit events is in effect the modelling of the times to default of various names. The distribution of individual times to default can be calibrated from CDS quotes, but for more complicated instruments, such as CDOs, the joint law is needed. Industry practice is to model this correlation using a copula or base correlation approach, both of which suffer significant deficiencies...

claimant and defendant’s presence has different consequences and sanctions if the legislator said that their default is not an obstacle for proceeding. current remedy is annulling the claim or default judgment. this remedy is different in the previous islamic law and our past laws and french law. the notion of presence in islamic law is personal presence and so is different from its current not...