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Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity by Frédéric Patras, Damiano Brigo, Tomasz R. Bielecki

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Chapter 3

An Introduction to Multiname Modeling in Credit Risk

Aurélien Alfonsi

Université Paris-Est, CERMICS

This chapter is intended to be an introductory survey on credit risk models for multiname products. We first present the intensity models for single defaults, which leads up to the copula model. We hint at its limits, especially concerning the dependence dynamics between defaults that it induces. As an alternative, we consider loss models and present several reduced-form models that are designed to have known distributions through their Fourier transform. We then present the Markovian projection of the loss process, and introduce the local intensity model and its extensions. Last, we focus on two forward loss models whose principle is ...

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