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Co-monotonic Default Quote Paths for Basket Evaluation

by Christian Bluhm of Credit Suisse, and
Ludger Overbeck of the University of Giessen and HypoVereinsbank

August 2005

Abstract: The evaluation of structured credit products like baskets and collateralized debt obligations (CDOs) most often relies on the simulation of correlated default times for the underlying pool of credit instruments. Given the distribution of a default time vector one can find the distribution of the corresponding (cumulative) default quote path for a portfolio. In this note we show that the multivariate dependence of marginal default quote distributions over time can be based on a comonotonic structure without loosing information regarding default timing. Based on comonotonicity, default quote paths and random variables arising from basket evaluation like the time until the n-th default can be simulated very efficiently.

Keywords: Default Baskets, CDOs, Default Quote Paths.

Published in: RISK, Vol. 18, No. 8, (August 2005), pp. 67-71.

Previously titled: Comonotonic Default Quote Paths

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