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Pricing Path-Dependent Credit Products

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Part of the Applied Quantitative Finance book series (AQF)

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.

Keywords

Interest Rates Modelling Copula Approach Price Example Diversity Loss Copula Function 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© The Author(s) 2017

Authors and Affiliations

  1. 1.LondonUK

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