SIMULTANEOUS CALIBRATION TO A RANGE OF PORTFOLIO CREDIT DERIVATIVES WITH A DYNAMIC DISCRETE-TIME MULTI-STEP MARKOV LOSS MODEL

This article describes a dynamic discrete-time multi-step Markov model for the losses experienced by a given credit portfolio, and develops a method for the simultaneous calibration of the model to all available relevant market prices (for CDO's, forward-start CDO's, options on CDO's,...

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Veröffentlicht in:International Journal of Theoretical and Applied Finance (IJTAF) 2009-08, Vol.12 (5), p.633-662
1. Verfasser: WALKER, MICHAEL B.
Format: Artikel
Sprache:eng
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Zusammenfassung:This article describes a dynamic discrete-time multi-step Markov model for the losses experienced by a given credit portfolio, and develops a method for the simultaneous calibration of the model to all available relevant market prices (for CDO's, forward-start CDO's, options on CDO's, leveraged super-senior tranches with loss triggers, etc.) established on a given day. The implementation is via an efficient linear programming procedure, and examples are given. The approach represents an extension of previous work (Walker, 2005, 2006; Torresetti et al., 2006) on the static loss-surface model to a model containing the necessary underlying dynamics.
ISSN:0219-0249
1793-6322
1793-6322
DOI:10.1142/S0219024909005439