A Markovian approach to modelling correlated defaults
Vladyslav Putyatin, David Prieul and Svetlana Maslova unveil a simple dynamic binomial credit model with a Poissonian mixing distribution to satisfy the constraints faced by financial institutions assessing their credit exposure in a consistent manner over time thanks to the Markovian property of the model. The possibility of adopting multiple parameterisations of the correlation structure allows for the pricing and the risk management of large credit portfolios while preserving computational efficiency through closed-form solutions
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