A Top Down Approach to Multi-name Credit

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A Top Down Approach to Multi-name Credit

by Kay Giesecke of Stanford University, and
Lisa R. Goldberg of MSCI Barra

November 5, 2007

Abstract: Intensity based models of the portfolio loss process that are specified without reference to the portfolio constituents lead to tractable credit derivatives valuation formulae and accurate tranche market calibrations. We show how to complement these models with random thinning, which decomposes the portfolio loss process into single name loss processes. Random thinning facilitates consistent pricing and calibration of single- and multi-name securities and estimation of single name hedges.

Keywords: dependent defaults, portfolio loss, credit derivative, point process, compensator, intensity, random thinning.

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