Prof. Philipp Schönbucher from the ETH Zurich is giving an Extra-VGSF
research seminar on "Portfolio Losses and the Term Structure of Loss
Transition Rates: A new methodology for the pricing of portfolio credit
derivatives" on Monday, June 19th, from 18:00 to 19:30 at the Vienna
University of Business Administration and Economics (WU Wien,
Nordbergstrasse 15, 1090 Wien), SR A619, UZA 4. Please find the paper's
abstract below.
Best,
Michael Halling
Abstract
In this paper, we present a model for the joint stochastic evolution of the
cumulative loss process of a credit portfolio and of its probability
distribution. At any given time, the loss distribution of the portfolio is
represented using forward transition rates, i.e. the transition rates of a
hypothetical time-inhomogeneous Markov chain which reproduces the desired
transition probability distribution. This approach allows a straightforward
calibration of the model (e.g. to a full initial term- and strike structure
of synthetic CDOs including the correlation smile) and it is shown that
(except for regularity restrictions) every arbitrage-free loss distribution
admits such a representation with forward transition rates. To capture the
stochastic evolution of the loss distribution, the transition rates are then
equipped with stochastic dynamics of their own, and martingale / drift
restrictions on these dynamics are derived which ensure absence of arbitrage
in the model. Furthermore, we analyze the dynamics of spreads and
STCDO-prices that are implied by the model and show that the input
parameters can be viewed as spread move parameters and correlation move
parameters. We also show how every dynamic model for correlated individual
defaults can be cast into this framework.