Economy – Quantitative Finance – Risk Management
Scientific paper
2011-04-27
Economy
Quantitative Finance
Risk Management
This paper has been withdrawn by the authors because some of the main results have significant overlap with others available i
Scientific paper
The classical reduced-form and filtration expansion framework in credit risk is extended to the case of multiple, non-ordered defaults, assuming that conditional densities of the default times exist. Intensities and pricing formulas are derived, revealing how information driven default contagion arises in these models. We then analyze the impact of ordering the default times before expanding the filtration. While not important for pricing, the effect is significant in the context of risk management, and becomes even more pronounced for highly correlated and asymmetrically distributed defaults. Finally, we provide a general scheme for constructing and simulating the default times, given that a model for the conditional densities has been chosen.
Kchia Younes
Larsson Martin
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