Intensity gamma

Mark Joshi and Alan Stacey develop a new model for correlation of credit defaults based on a financially intuitive concept of business time similar to that in the variance gamma model for stock price evolution

In the past few years, the portfolio credit derivatives market has grown rapidly. Such derivatives pay out in line with the defaults of a number of reference assets. A feature of such derivatives is therefore that the co-dependence of the assets' default times is a strong driver of their price. In this article, we introduce a new mechanism for achieving default dependence that has attractive features, including ease of calibration, time-homogeneity and the ability to match market prices.

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