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arXiv · 0901.3398

BSLP: Markovian Bivariate Spread-Loss Model for Portfolio Credit Derivatives

Matthias Arnsdorf·Igor Halperin
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Abstract

BSLP is a two-dimensional dynamic model of interacting portfolio-level loss and spread (more exactly, loss intensity) processes. The model is similar to the top-down HJM-like frameworks developed by Schonbucher (2005) and Sidenius-Peterbarg-Andersen (SPA) (2005), however is constructed as a Markovian, short-rate intensity model. This property of the model enables fast lattice methods for pricing various portfolio credit derivatives such as tranche options, forward-starting tranches, leveraged super-senior tranches etc. A non-parametric model specification is used to achieve nearly perfect calibration to liquid tranche quotes across strikes and maturities. A non-dynamic version of the model obtained in the zero volatility limit of stochastic intensity is useful on its own as an arbitrage-free interpolation model to price non-standard index tranches off the standard ones.

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BibTeXRIS

Matthias Arnsdorf, Igor Halperin. 2009-01-22. BSLP: Markovian Bivariate Spread-Loss Model for Portfolio Credit Derivatives. https://arxiv.org/abs/0901.3398

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