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A Simple Exponential Model for Dependent Defaults

by Kay Giesecke of Cornell University

December 2003

Abstract: A thorough understanding of the joint default behavior of credit-risky securities is essential for credit risk measurement as well as the valuation of multi-name credit derivatives and Collateralized Debt Obligations. In this paper we study a simple and tractable intensity-based model for correlated defaults, in which unpredictable default arrival times are jointly exponentially distributed. Since all relevant results are given in closed form, the model can be easily implemented. The efficient simulation of dependent default times for pricing and risk management purposes is straightforward as well. Parameter calibration relies on market data as well as data and figures provided by rating agencies and credit risk management solutions.

JEL Classification: G12, G13.

Keywords: correlated defaults, multivariate exponential model, simulation.

Published in: Journal of Fixed Income, Vol. 13, No. 3, (December 2003), pp. 74-83.

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