INDUSTRIAL ENGINEERING AND OPERATIONS RESEARCH
IEOR 298-1
PRESENTS
IEOR MONDAY SEMINAR
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Lisa Goldberg,
MSCI Barra, Inc.
> A TOP DOWN APPROACH TO MULTI-NAME CREDIT
_Abstract_
>We examine multi-name credit models from the perspective of point
processes. In this context, it is
natural to pursue a top down approach: the economy as a whole is modeled first.
The technique of random thinning consistently generates sub-models for
individual firms or portfolios.
>
>A candidate for the top down approach is a self-exciting process, whose
intensity at any time depends on the sequence of events observed up to that
time. A self-exciting process incorporates the contagion observed in credit
markets and avoids an ad hoc choice of copula. The familiar doubly stochastic
process is at the opposite end of the spectrum in the sense that it is
constructed from the bottom up: individual firm intensities are estimated and
then
>aggregated. We rigorously analyze self-exciting and doubly stochastic
processes with respect to their ability to capture contagion.
>
>Model fitness can be tested using a deep result of meyer
(1971), which shows that any point process with continuous compensator can be
transformed into a standard Poisson process by a change of time. Meyer's result
allows us to extend the scope of the tests proposed by Duffie,
Das and Kapadia (2004) for
a doubly stochastic model.
>
>
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