Pricing Path-Dependent Credit Products

Part of the Applied Quantitative Finance book series (AQF)


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.


Interest Rates Modelling Copula Approach Price Example Diversity Loss Copula Function 
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Copyright information

© The Author(s) 2017

Authors and Affiliations

  1. 1.LondonUK

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