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| Computational Techniques for Basic Affine Models of Portfolio Credit Risk by Andreas Eckner of Stanford University November 12, 2007 Abstract: This paper presents computational techniques that make a certain class of fully dynamic intensity-based models for portfolio credit risk, along the lines of Duffie and Gârleanu (2001) and Mortensen (2006), just as computationally tractable as the static copula model. Compared to previous such models in the literature, we improve the fit to CDX tranche spreads by a factor of around five, by explicitly taking liquidity and modified-restructuring risk into account, and by allowing for a more flexible correlation structure. The resulting model can be used to hedge a wide range of risks in the credit market, such as the risk of changes in correlations, volatilities, or idiosyncratic default risk. JEL Classification: C63, G12, G33. Keywords: credit risk, correlated default, structured credit derivatives, affine jump diffusion, intensity-based model, CDO pricing. Books Referenced in this Paper: (what is this?)
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