Gamma process dynamic modelling of credit

The existing generation of credit derivatives models is unsatisfactory because they generally contain arbitrage, cannot describe the dynamics of the process, and are hard to extend beyond vanilla products. Martin Baxter has created a new tractable family of credit models, based on the gamma process, which allows arbitrage-free pricing of correlated credits in a dynamic model framework that can straightforwardly handle bespoke baskets and exotic products

The standard Gaussian copula model, with its overlay of base correlation, is useful but not ideal. It is essentially a static look-up table that does not model the dynamics of the process. It is hard to extend to bespoke baskets or other products, and it readily admits arbitrage.

Various models have been proposed to address these problems. These include both structural models that drive the value of the firm (or proxy) and reduced-form models that drive default intensity rates or the loss

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

Most read articles loading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here