Journal of Computational Finance

Risk.net

Modeling correlated defaults: first passage model under stochastic volatility

Jean-Pierre Fouque, Brian C. Wignall, Xianwen Zhou

ABSTRACT

Default dependency structure is crucial in pricing multi-name credit derivatives as well as in credit risk management. In this paper, we extend the first passage model for one name with stochastic volatility (Fouque et al 2006) to the multi-name case. Correlation of defaults is generated by correlation between the Brownian motions driving the individual names as well as through common stochastic volatility factors. A numerical example for the loss distribution of a portfolio of defaultable bonds is examined after stochastic volatility is incorporated.

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

If you already have an account, please sign in here.

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: