Economics - Research Publications

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    Intensity gamma: a new approach to pricing portfolio credit derivatives
    Joshi, Mark S. ; Stacey, Alan M. ( 2006-03)
    We develop a completely new model for correlation of credit defaults basedon a financially intuitive concept of business time similar to that in the Variance Gammamodel for stock price evolution. Solving a simple equation calibrates each name to itscredit spread curve and we show that the overall model can be calibrated to the marketbase correlation curve of a tranched CDO index. Once this calibration is performed,obtaining consistent arbitrage-free prices for non-standard tranches, products based ondifferent underlying names and even more exotic products such as CDO2 is straightforward and rapid.