Analysis of Dependency Structure of Default Processes Based on Bayesian Copula (original) (raw)
2014, Journal of the Iranian Statistical Society
One of the main problems in credit risk management is the correlated default. In large portfolios, computing the default depen- dencies among issuers is an essential part in quantifying the portfolio's credit. The most important problems related to credit risk management are understanding the complex dependence structure of the associated variables and lacking the data. This paper aims at introducing a new methodology for credit risk management based on Bayesian copulas. In this paper, the focus is specifically on a new method of simulating the joint distribution of default risk. This methodology joins the use of cop- ulas and Bayesian models. Using copulas, the joint multivariate prob- ability distribution of a random vector can be separated into individ- ual components characterized by marginal distributions. The model is based on a jump diffusion process for the intensities. Another important problem in credit risk management is the lack of data, which influences the paramete...
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