DefaultRisk.com the web's biggest credit risk modeling resource.

Credit Jobs

Home Glossary Links FAQ / About Site Guide Search
pp_corr116

Up

Submit Your Paper

In Rememberance: World Trade Center (WTC)

Export citation to:
- HTML
- Text (plain)
- BibTeX
- RIS
- ReDIF

Infectious Default Model with Recovery and Continuous Limits

by Ayaka Sakata of the University of Tokyo,
Masato Hisakado of Standard & Poor's, and
Shintaro Mori of Kitasato University

January 20, 2008

Abstract: We introduce an infectious default and recovery model for N obligors. The obligors are assumed to be exchangeable and their states are described by N Bernoulli-type random variables Si (i = 1,иии,N). They are expressed by multiplying independent Bernoulli variables Xi , Yij and Y′ij , and the default and recovery infections are described by Yij and Y′ij . We obtain the default probability function P(k) for k defaults. By considering a continuous limit, we find two nontrivial probability distributions with a reflection symmetry of Si ↔ 1 − Si . Their profiles are singular and oscillating and we theoretically investigate it. We also compare P(k) with an implied default distribution function inferred from the quotes of iTraxx-CJ, which is a portfolio credit derivative of Japanese 50 companies. In order to explain the behavior of the implied distribution, the recovery effect may be necessary.

Keywords: default correlation, correlated binomial, default distribution, continuous limit.

Published in: Journal of the Physical Society of Japan, Vol. 76, No. 5, (May 2007), pp. 054801-054807.

Books Referenced in this paper:  (what is this?)

Download paper (547K PDF) 14 pages