A market model on the iTraxx

In formulating a market model for credit-risky baskets analogous to the Libor market model (LMM), we must first choose an appropriate numéraire under which the spread is a martingale, then examine what drift is picked up in the pricing measure, and determine a consistent loss process. Inspired by the original work of Brace, Gatarek & Musiela (1997) on the LMM, we can extend to index spreads a proposal by Schönbucher (2004) and Brigo (2005), by taking risky zero-coupon (RZC) bonds as the natural

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