Pricing Multiname Credit Derivatives: Heavy Tailed Hybrid Approach
by Roy Mashal of the Columbia Business School, and
January 7, 2002
Abstract: In recent years, credit derivatives have become the main tool for transferring and hedging credit risk. The credit derivatives market has grown rapidly both in volume and in the breadth of the instruments it offers. Among the most complicated of these instruments are the multiname ones. These are instruments with payoffs that are contingent on the default realization in a portfolio of names. The modeling of dependent defaults is difficult because there is very little historical data available about joint defaults and because the prices of those instruments are not quoted. Therefore the models cannot be calibrated, neither to defaults nor to prices.
Keywords: Credit risk, credit derivatives, copula functions, portfolio models.