A Copula Contagion Mixture Model and its Pricing Impact on Portfolio Credit Derivatives

H. Zheng (UK)

Keywords

copula contagion mixture model, exponential decay, basket CDS and CDO.

Abstract

In this paper we propose a copula contagion mixture model for correlated default times. The model includes the well known factor, copula, and contagion models as its special cases. The key advantage of such a model is that we can study the interaction of different models and their pricing impact. Speci´Čücally, we model the marginal default times to follow some contagion intensity processes coupled with copula dependence structure. We apply the total hazard construction method to generate ordered default times and numerically compare the pricing impact of different models on basket CDSs and CDOs in the presence of exponential decay factor.

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