Overlapping Credit Portfolios
In this article, we present an accurate analytical approximation for a joint distribution function of loss of two overlapping credit portfolios using the multidimensional saddlepoint method. The same method is applied to the tail probability of loss from two tranches and to CDO-squared. Numerical examples show that the default correlations effectively destroy non-normal tails, making the conditional normal approximation viable in many practical cases.
Authors: Timur Misirpashaev, and Alexander Antonov
In this article, we present an accurate analytical approximation for a joint distribution function of loss of two overlapping credit portfolios using the multidimensional saddlepoint method. The same method is applied to the tail probability of loss from two tranches and to CDO-squared. Numerical examples show that the default correlations effectively destroy non-normal tails, making the conditional normal approximation viable in many practical cases.
Authors: Timur Misirpashaev, and Alexander Antonov
Authors
Dr. Alexandre Antonov
Dr. Antonov received his PhD degree from the Landau Institute for Theoretical Physics in 1997 and joined Numerix in 1998, where he currently works as a Senior Vice President of Quantitative Research. His activity is concentrated on modeling and numerical methods for interest rates, cross currency, hybrid, credit and CVA. Dr. Antonov is a published author for multiple publications in mathematical finance, including RISK magazine and a frequent speaker at financial conferences.
