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2017 | OriginalPaper | Chapter

16. Pricing Path-Dependent Credit Products

Author : Youssef Elouerkhaoui

Published in: Credit Correlation

Publisher: Springer International Publishing

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Abstract

This chapter addresses the problem of pricing (soft) path-dependent portfolio credit derivatives whose payoff depends on the loss variable at different time horizons. We review the general theory of copulas and Markov processes, and we establish the link between the copula approach and the Markov-Functional paradigm used in interest rates modelling. Equipped with these theoretical foundations, we show how one can construct a dynamic credit model, which matches the correlation skew at each tenor, by construction, and follows an exogenously specified choice of dynamics. Finally, we discuss the details of the numerical implementation and we give some pricing examples in this framework.

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Literature
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F. Lindskog, A. McNeil, Common Poisson shock models: applications to insurance and credit risk modelling. ASTIN Bullet. 33(2), 209–238 (2003)CrossRef
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Metadata
Title
Pricing Path-Dependent Credit Products
Author
Youssef Elouerkhaoui
Copyright Year
2017
Book
Credit Correlation

Print ISBN: 978-3-319-60972-0

Electronic ISBN: 978-3-319-60973-7

Copyright Year: 2017

DOI
https://doi.org/10.1007/978-3-319-60973-7_16