Credit Contagion And Risk Management With Multiple Non-ordered Defaults

The classical reduced-form and filtration expansion framework in credit risk is extended to the case of multiple, non-ordered defaults, assuming that conditional densities of the default times exist. Intensities and pricing formulas are derived, revealing how information-driven default contagion arises in these models. The authors then analyze the impact of ordering the default times before expanding the filtration. While not important for pricing, the effect is significant in the context of risk management, and becomes even more pronounced for highly correlated and asymmetrically distributed defaults. Finally, they provide a general scheme for constructing and simulating the default times, given that a model for the conditional densities has been chosen.

Provided by: Cornell University Topic: Data Management Date Added: Jun 2011 Format: PDF

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