Credit portfolio correlations with dynamic leverage ratios

Publisher:
Wiley
Publication Type:
Chapter
Citation:
Credit Securitisations and Derivatives: Challenges for the Global Markets, 2013, 1st, pp. 71 - 94
Issue Date:
2013-01
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This chapter extends the dynamic leverage ratio model of of Hui et al. to the two-firm case so as to study the implications for default correlations and joint survival probabilities. The two-firm model has been proposed by Zhou, who extends the one-firm model of Black and Cox to the two-firm situation. The chapter reviews the techniques used by the authors to solve the first-passage-time problem: the method of images and the time varying barrier technique for dealing with time-dependent parameters. The chapter presents the numerical results for the impact on joint survival probabilities and default correlations across a range of different scenarios, for example, different correlation levels, drift rates, volatilities and initial leverage ratios
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