On Default Correlation: A Copula Function Approach
Year: 2000
Type: article
Abstract: This article studies the problem of default correlation. It introduces a random variable called “time-until-default” to denote the survival time of each defaultable entity or financial instrument, and defines the default correlation between two credit risks as the correlation coefficient between their survival times. The author explains why a copula function approach should be used to specify the joint distribution of survival times after marginal distributions of survival times are derived from market information, such as risky bond prices or asset swap spreads. He shows that the current approach to default correlation through asset correlation is equivalent to using a normal copula function. Numerical examples illustrate the use of copula functions in the valuation of some credit derivatives, such as credit default swaps and first-to-default contracts.
Source: The Journal of Fixed Income
Author: David Xianglin Li
Institution: Shanghai Jiao Tong University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2282382832