Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 545: A Markov Copula Model of Portfolio Credit Risk with Stochastic Intensities and Random Recoveries
T.R. Bielecki, A. Cousin, S. Crépey and Alexander Herbertsson ()
Additional contact information
T.R. Bielecki: Illinois Institute of Technology, Postal: Department of Applied Mathematics,, Chicago, IL 60616, USA
A. Cousin: Université de Lyon, Postal: Laboratoire SAF, EA 2429,, Laboratoire SAF, EA 2429,, 50 Avenue Tony Garnier, 69007 Lyon, France.
S. Crépey: Université d’Évry Val d’Essonne, Postal: Laboratoire Analyse et Probabilités,, 91037 Évry Cedex, France
Alexander Herbertsson: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O.Box 640,, SE 405 30 Gothenburg,, Sweden
Abstract: In [4], the authors introduced a Markov copula model of portfolio credit risk. This model solves the top-down versus bottom-up puzzle in achieving efficient joint calibration to single-name CDS and to multi-name CDO tranches data. In [4], we studied a general model, that allows for stochastic default intensities and for random recoveries, and we conducted empirical study of our model using both deterministic and stochastic default intensities, as well as deterministic and random recoveries only. Since, in case of some “badly behaved” data sets a satisfactory calibration accuracy can only be achieved through the use of random recoveries, and, since for important applications, such as CVA computations for credit derivatives, the use of stochastic intensities is advocated by practitioners, efficient implementation of our model that would account for these two issues is very important. However, the details behind the implementation of the loss distribution in the case with random recoveries were not provided in [4]. Neither were the details on the stochastic default intensities given there. This paper is thus a complement to [4], with a focus on a detailed description of the methodology that we used so to implement these two model features: random recoveries and stochastic intensities.
Keywords: Portfolio Credit Risk; Markov Copula Model; Common Shocks; Stochastic Spreads; Random Recoveries
JEL-codes: C02; C63; G13; G32; G33
21 pages, October 16, 2012
Note: Contact information: alexander.herbertsson@economics.gu.se
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