Graphical models for correlated defaults
Computational Finance
2008-12-10 v1 Probability
Risk Management
Statistical Finance
Abstract
A simple graphical model for correlated defaults is proposed, with explicit formulas for the loss distribution. Algebraic geometry techniques are employed to show that this model is well posed for default dependence: it represents any given marginal distribution for single firms and pairwise correlation matrix. These techniques also provide a calibration algorithm based on maximum likelihood estimation. Finally, the model is compared with standard normal copula model in terms of tails of the loss distribution and implied correlation smile.
Keywords
Cite
@article{arxiv.0809.1393,
title = {Graphical models for correlated defaults},
author = {I. Onur Filiz and Xin Guo and Jason Morton and Bernd Sturmfels},
journal= {arXiv preprint arXiv:0809.1393},
year = {2008}
}
Comments
30 pages, 16 figures