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http://hdl.handle.net/2451/26800
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| Title: | The Underlying Dynamics of Credit Correlations |
| Authors: | Berd, Arthur
Engle, Robert
Voronov, Artem |
| Issue Date: | Oct-2005 |
| Series/Report no.: | S-DRP-05-04 |
| Abstract: | We propose a hybrid model of portfolio credit risk where the dynamics of
the underlying latent variables is governed by a one factor GARCH
process. The distinctive feature of such processes is that the long-term
aggregate return distributions can substantially deviate from the
asymptotic Gaussian limit for very long horizons. We introduce the
notion of correlation spectrum as a convenient tool for comparing
portfolio credit loss generating models and pricing synthetic CDO
tranches. Analyzing alternative specifications of the underlying
dynamics, we conclude that the asymmetric models with TARCH volatility
specification are the preferred choice for generating significant and
persistent credit correlation skews. |
| URI: | http://hdl.handle.net/2451/26800 |
| Appears in Collections: | Derivatives Research
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