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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26940

Title: The Underlying Dynamics of Credit Correlations
Authors: Berd, Arthur
Engle, Robert
Voronov, Artem
Issue Date: Oct-2005
Series/Report no.: SC-CFE-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/2451/26940
Appears in Collections:Financial Econometrics

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