Valuation of Portfolio Credit Derivatives with Default Intensities Using the Vasicek Model |
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Authors: | Jin Liang Jun Mei Ma Tao Wang Qin Ji |
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Institution: | 1.Department of Mathematics,Tongji University,Shanghai,People’s Republic of China;2.Department of Applied Mathematics,Shanghai University of Finance and Economics,Shanghai,People’s Republic of China |
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Abstract: | We present a methodology for valuing portfolio credit derivatives under a reduced form model for which the default intensity
processes of risk assets follow the one-factor Vasicek model. A closed-form solution of joint survival time distribution is
obtained. The solution is applied to value credit derivatives of a credit default swap index and collateralized debt obligation.
The limitation of methods using the Vasicek model is discussed. We propose that the method is valid and efficient for a portfolio
with small-scale correlated risk assets, for which the acceptable size is much greater than for the traditional method. Numerical
examples and parameter analysis are also presented. |
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Keywords: | |
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