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SoChi: A local moment surface pricing method of the basket credit products

by Andrey Chirikhin of HSBC, and
Mikhail Soloveitchik of HSBC

November 13, 2008

Abstract: We propose a bottom-up dynamic credit modelling framework. To achieve a non-trivial coupling, the marginal survival probability processes are multiplied by a common exponential martingale process. Still being a factor coupling, this approach relies on convolution of the conditionally independent random variables. However, due to the much better analytical tractability, this approach allow getting rid of the traditional recursions as convolution methods, and it does not require tuning the factor quadrature, as the factor integration step is not present. Also the model can be entirely specified only in terms of the local moment surface of the common factor process, with different moments affecting different segments of the loss distribution.

Keywords: basket, credit, dynamic, bottom-up, CDO.

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