Dynamic modelling of single-name credits and CDO tranches
نویسنده
چکیده
There are two basic ideas behind the new model. Firstly, the tails of the normal distribution are too light to match the reality of market tails. In the equity market this is a recognised truth and low-strike equity premia are much higher than log-normal models would indicate. It can also be seen in the problems that simple Brownian structural models have when they underestimate short-term default intensities. In common with other recent research, the solution for this problem is to add jumps to the processes. This makes the tails of the distribution heavier and more realistic.
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