Levy Density Based Intensity Modeling of the Correlation Smile

B S Balakrishna

MPRA Paper from University Library of Munich, Germany

Abstract: The jump distribution for the default intensities in a reduced form framework is modeled and calibrated to provide reasonable fits to CDX.NA.IG and iTraxx Europe CDOs, to 5, 7 and 10 year maturities simultaneously. Calibration is carried out using an efficient Monte Carlo simulation algorithm suitable for both homogeneous and heterogeneous collections of credit names. The underlying jump process is found to relate closely to a maximally skewed stable Levy process with index of stability alpha ~ 1.5.

Keywords: Default Risk; Default Correlation; Default Intensity; Intensity Model; Levy Density; CDO; Monte Carlo (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2008-07-16, Revised 2009-04-06
New Economics Papers: this item is included in nep-ecm and nep-rmg
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