We introduce a class of flexible and tractable static factor models for the joint term structure of  default probabilities, the factor copula models. These high dimensional models remain parsimonious with pair copula constructions, and nest numerous standard models as special cases. With finitely supported random losses, the loss distributions of credit portfolios and derivatives can be exactly and efficiently computed  . Numerical examples on collateral debt obligation (CDO), CDO squared, and credit index swaption illustrate the versatility of our framework . An empirical exercise shows that a simple model specification can fit credit index tranche prices.
We present a class of flexible and tractable static factor models for the term structure of joint default probabilities, the factor copula models. These high dimensional models remain parsimonious with pair copula constructions, and nest many standard models as special cases. The loss distribution of a portfolio of contingent claims can be exactly and efficiently computed when individual losses are discretely supported on a finite grid . Numerical examples study the key features affecting the loss distribution and multi-name credit derivatives prices . An empirical exercise illustrates the flexibility of our approach by fitting credit index tranche prices.
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joint
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joint
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With finitely supported random losses, the loss distributions of credit portfolios and derivatives
The loss distribution of a portfolio of contingent claims
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when individual losses are discretely supported on a finite grid
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on collateral debt obligation (CDO), CDO squared, and credit index swaption illustrate the versatility of our framework
study the key features affecting the loss distribution and multi-name credit derivatives prices
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shows that a simple model specification can fit
illustrates the flexibility of our approach by fitting