Dynamic Credit Portfolio Modelling in Structural Models with Jumps

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Dynamic Credit Portfolio Modelling in Structural Models with Jumps

by Rüdiger Kiesel of Ulm University & London School of Economics, and
Matthias Scherer of TU Munich

December 18, 2007

Abstract: We present a structural jump-diffusion credit-portfolio model which models the loss distribution and dependence structure of the portfolio dynamically. We are able to obtain the log-asset correlation analytically and precise estimates of the term-structure of default correlations within the model. The model allows the simultaneous pricing of bonds, CDS and portfolio derivatives across all maturities. We present an efficient algorithm for the calibration of our model, which makes the model suitable for practical applications. As an example we calibrate our model to iTraxx quotes of Collateral Debt Obligations (CDOs).

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