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In this paper, we present a methodology for pricing and hedging portfolio credit derivatives in a dynamic credit model. Starting with a single-name Marshall–Olkin framework, we build a dynamicExpand
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Hedging in Incomplete Markets
In this chapter, we present a methodology for hedging basket credit derivatives with single name instruments. Because of the market incompleteness due to the residual correlation risk, perfectExpand
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Expectations in the Enlarged Filtration
In this chapter, we derive a formula of the conditional expectation with respect to the enlarged filtration. This is a generalization of the Dellacherie formula. We shall use this key result toExpand
Correlation Skew: A Black-Scholes Approach
In this chapter, we view the valuation of CDO tranches as an option pricing problem. The payoff of a CDO tranche is a call-spread on the loss variable. By specifying the distribution of the lossExpand
Introduction and Context
To set the context, we start this introduction with a presentation of the main (portfolio) credit derivative contracts that we are interested in. When we talk about portfolio credit derivativeExpand
Copulas and Conditional Jump Diffusions
Enlarging the economic state-variables’ filtration by observing the default process of all available credits has some profound implications on the dynamics of intensities.
An Introduction to the Marshall-Olkin Copula
In this chapter, we present the Marshall-Olkin copula model where the correlation profile is constructed via a set of common shocks, which can trigger joint defaults in the basket.
The Homogeneous Transformation
In general, the number of sub-FTDs in the replication formula is a function of n, the size of the basket, and k, the order of the basket default swap. The most time-consuming step in the evaluationExpand
Third Generation Models: From Static to Dynamic Models
In this chapter, we review some of the most important dynamic credit models in the literature. Expand
The Asymptotic Expansion
In this chapter, we relax the homogeneous portfolio assumption, and we derive an asymptotic series expansion of the \(k{\text {th}}\)-to-default Q-factor in the non-homogeneous case. We also show howExpand