2009/01/22 by Igor Halperin, Halperin, Igor, Pascal Tomecek +1 · 1 citation
Business, Management and Accounting · Economics, Econometrics and Finance · #Credit Risk and Financial Regulations #Financial Distress and Bankruptcy Prediction #Stochastic processes and financial applications #q-fin.CP #q-fin.PR
paper · pdf · doi:10.48550/arxiv.0901.3404
34 pages, 9 figures
arxiv created 2009/01/22 · arxiv updated 2009/12/01
In the top-down approach to multi-name credit modeling, calculation of singe name sensitivities appears possible, at least in principle, within the so-called random thinning (RT) procedure which dissects the portfolio risk into individual contributions. We make an attempt to construct a practical RT framework that enables efficient calculation of single name sensitivities in a top-down framework, and can be extended to valuation and risk management of bespoke tranches. Furthermore, we propose a dynamic extension of the RT method that enables modeling of both idiosyncratic and default-contingent individual spread dynamics within a Monte Carlo setting in a way that preserves the portfolio "top"-level dynamics. This results in a model that is not only calibrated to tranche and single name spreads, but can also be tuned to approximately match given levels of spread volatilities and correlations of names in the portfolio.