Modelling Dynamic Portfolio Credit Risk

Rogge, E.; Schönbucher, P.J. (2003)

Research paper

In this paper we present a model to price and hedge basket credit derivatives and collateralised loan obligation. Based upon the copula-approach by Schönbucher and Schubert (2001) the model allows a specification of the joint dynamics of credit spreads and default intensities, including a speci¯cation of the infection dynamics which cause credit spreads to widen at defaults of other obligors. Because of a high degree of analytical tractability, joint default and survival probabilities and also sensitivities can be given in closed-form which facilitates the development of hedging strategies based upon the model. The model uses a generalisation of the class of Archimedean copula functions which gives rise to more realistic credit spread dynamics than the Gaussian copula or the Student-t-copula which are usually chosen in practice. An example speci¯cation using Gamma-distributed factors is provided.

• All authors: Rogge, E.; Schönbucher, P.J.
• Date: 2003