2025/03/05 by Torri, Gabriele, Giacometti, Rosella, Farina, Gianluca
#FOS: Economics and business #Pricing of Securities (q-fin.PR)
paper · doi:10.48550/arxiv.2503.03306
We introduce a model for the loss distribution of a credit portfolio considering a contagion mechanism for the default of names which is the result of two independent components: an infection attempt generated by defaulting entities and a failed defence from healthy ones. We then propose an efficient recursive algorithm for the loss distribution. Then we extend the framework with more flexible distributions that integrate a contagion component and a systematic factor to better fit real-world data. Finally, we propose an empirical application in which we price synthetic CDO tranches of the iTraxx index, finding a good fit for multiple tranches.