Journal of Credit Risk

Risk.net

Credit models and the crisis: default cluster dynamics and the generalized Poisson loss model

Damiano Brigo, Andrea Pallavicini, Roberto Torresetti

ABSTRACT

We consider collateralized debt obligations (CDOs), analyzing their valuation (both pre-crisis and in-crisis) with the generalized Poisson loss model. GeneralizedPoisson loss is an arbitrage-free dynamic loss model capable of calibrating all tranches for all maturities simultaneously. Alternative tranche analysis using the implied copula framework or using historical estimation techniques highlights a multimodal tail in the loss distribution underlying the CDO. An effective description of loss dynamics in terms of the generalized Poisson loss model explains how the multimodal loss-probability distribution can be considered to arise from explicitly modeling the default of subsets of names within the CDO's pool of names. Such default clusters may in turn be interpreted as sectors of the economy. Our discussion is supported by abundant market examples through history, both pre-crisis and in-crisis.

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

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