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Published in:
2010 | OriginalPaper | Chapter
Dynamic Modeling of Dependence in Finance via Copulae Between Stochastic Processes
Authors : Tomasz R. Bielecki, Jacek Jakubowski, Mariusz Niewęgłowski
Published in: Copula Theory and Its Applications
Publisher: Springer Berlin Heidelberg
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Modeling of stochastic dependence is crucial to pricing and hedging of basket derivatives, as well as to pricing and hedging of some other financial products, such as rating-triggered corporate step-up bonds. The classical approach to modeling of dependence in finance via static copulae (and Sklar’s theorem) is inadequate for consistent valuation and hedging in time. In this survey we present recent developments in the area of modeling of dependence between stochastic processes with given marginal laws. Some of these results have already been successfully applied in finance in connection with the portfolio credit risk.