Journal of Credit Risk

Risk.net

Extensions to the Gaussian copula: random recovery and random factor loadings

Leif Andersen, Jakob Sidenius

ABSTRACT

This paper presents two new models of portfolio default loss that extend the standard Gaussian copula model yet preserve tractability and computational efficiency. In one extension, we randomize recovery rates, explicitly allowing for the empirically well-established effect of inverse correlation between recovery rates and default frequencies.

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