Default Correlation:Comparison Study
Date Issued
2005
Date
2005
Author(s)
Chen, Shih-Yun
DOI
zh-TW
Abstract
Modeling default correlation correctly is an important task in risk management and pricing credit derivatives. We discuss why default correlation exists and its implication .Covering the two primary types of models that describe default process,“structural form model”and“reduced form model”.Under different model, we demonstrate how default correlation change over time under different credit quality and asset correlation. We find that, in both models, the default correlations over a short horizon are very small. Over the long run they increase and then slowly decrease with time. Default correlation and the asset correlation have the same sign. Finally we find that under different asset correlation, The default correlations in Zhou(2001) converge over a long horizon, but Gaussian copula’s(reduced form) default correlations still diverge.
Subjects
倒帳相關性
structural form
reduced form
Zhou model
Gaussian copula
Type
thesis