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Special Semester on Stochastics with Emphasis on Finance
Linz, September 2008 - December 2008
Presentation: Modeling and Estimation of Dependent Credit Rating Transitions

Workshop: Concluding Workshop

Time: Thu, December 04, 2008, 16:00-16:30

Speaker: Verena Goldammer

Abstract

Simultaneous defaults in large portfolios of credit derivatives can induce huge losses. To take this into account, we apply an interacting particle system to model the credit rating transitions of firms. In our model the credit rating changes of the firms follow a homogeneous Markov jump process with the generator of the strongly coupled random walk process introduced by Spitzer (1981).
The model depends on two sets of parameters, the vector of dependence parameters and the generator of the rating transitions of a single firm. For these parameters the maximum likelihood estimators are provided using historical rating transitions and sojourn times. Simulation of the process shows, how the shape of the profit and loss distribution of a large portfolio of defaultable zero-coupon bonds is influenced by the dependence vector.

Presentation slides (pdf, 232 KB)

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