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| Lévy Subordinator Model of Default Dependency by BS Balakrishna of unaffiliated July 22, 2010 Abstract: This article presents a model of default dependency based on Lévy subordinator. It is a tractable dynamical model, computationally structured similar to the one-factor Gaussian copula model, providing easy calibration to individual hazard rate curves and efficient pricing with Fast Fourier Transform techniques. The subordinator is an alpha=1/2 stable Lévy process, maximally skewed to the right, with its distribution function known in closed form as the Lévy distribution. The model provides a reasonable fit to market data with just two parameters to assess dependency risk, a measure of correlation and that of the likelihood of a catastrophe. Keywords: CDO, Default Risk, Lévy Distribution, Lévy Subordinator, FFT, Gaussian Copula. Books Referenced in this paper: (what is this?)
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