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LÚvy Simple Structural Models

by Martin Baxter of Nomura International plc

December 22, 2006

Abstract: This paper considers credit portfolio models based on Levy processes in general, and the Gamma model in particular. It describes both single-name and multi-name situations using the Gamma model, along with up-to-date calibration fits. There is also extensive historical data, including the May 2005 Auto crisis, which can be described in terms of the model. Risk management using the Gamma model is also discussed along with implementation details.

JEL Classification: G13.

Keywords: Structural credit model, CDO pricing, Levy process, Gamma process.

Published in: International Journal of Theoretical and Applied Finance, Vol. 10, No. 4, (June 2007), pp. 593-606.

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Related reading: A Generic One Factor Levy Model for Pricing Synthetic CDOs