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|Title: ||Multivariate First-Passage Models in Credit Risk|
|Authors: ||Metzler, Adam|
|Keywords: ||credit risk, CDOs, first passage times, conformal local martingales|
|Approved Date: ||17-Oct-2008 |
|Date Submitted: ||2008 |
|Abstract: ||This thesis deals with credit risk modeling and related mathematical issues. In particular we study first-passage models for credit risk, where obligors default upon first passage of a ``credit quality" process to zero.
The first passage problem for correlated Brownian motion is a mathematical structure which arises quite naturally in such models, in particular the seminal multivariate Black-Cox model. In general this problem is analytically intractable, however in two dimensions analytic results are available. In addition to correcting mistakes in several published formulae, we derive an exact simulation scheme for sampling the passage times. Our algorithm exploits several interesting properties of planar Brownian motion and conformal local martingales.
The main contribution of this thesis is the development of a novel multivariate framework for credit risk. We allow for both stochastic trend and volatility in credit qualities, with dependence introduced by letting these quantities be driven by systematic factors common to all obligors. Exploiting a conditional independence structure we are able to express the proportion of defaults in an asymptotically large portfolio as a path functional of the systematic factors. The functional in question returns crossing probabilities of time-changed Brownian motion to continuous barriers, and is typically not available in closed form. As such the distribution of portfolio losses is in general analytically intractable. As such we devise a scheme for simulating approximate losses and demonstrate almost sure convergence of this approximation. We show that the model calibrates well, across both tranches and maturities, to market quotes for CDX index tranches. In particular we are able to calibrate to data from 2006, as well as more recent ``distressed" data from 2008.|
|Department: ||Statistics and Actuarial Science|
|Degree: ||Doctor of Philosophy|
|Appears in Collections:||Electronic Theses and Dissertations (UW)|
Faculty of Mathematics Theses and Dissertations
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