Wednesday, November 28, 2012

A Stochastic Correlations Model for Default Risk

by Toby Daglish¤and Shaloub Razak
http://www.nzfc.ac.nz/archives/2008/papers/0820.pdf

interesting model for default probabilities used in a cdo: closed form for single firm, monte carlo for multiple firms. calibrate with credit default swap using an extended kalman filter. explains changing default correlation over time in copula models.

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