Mathematical Finance and Probability Seminars (Since covid these events are taking place online.)

The pricing of basket credit derivatives is contingent upon

1. realistic modeling of the firms' default times and the correlation between them; and
2. efficient computational methods for computing the portfolio loss distribution from the firms' marginal default time distributions.

We revisit intensity-based models and, with the aforementioned issues in mind, we propose improvements

1. via incorporating fast mean-reverting stochastic volatility in the default intensity processes; and
2. by considering a hybrid of a top-down and a bottom-up model with homogeneous groups within the original set of firms.

We present a calibration example from CDO data, and discuss the relative performance of the approach. This is joint work with Evan Papageorgiou. ( Slides)

Speaker: Ronnie Sircar, Princeton University