The Crash-NIG-Factor Copula Model: Modeling dependence in Credit Portfolios through the Crisis

It is well known that the one-factor copula models are very useful for risk management and measurement applications involving the generation of scenarios for the complete uni- verse of risk factors and the inclusion of CDO structures in a portfolio context. For this objective, it is necessary to have a simple and fast model that is also consistent with the scenario simulation framework. In this paper we present three extensions of the NIG one- factor copula model which jointly have not been considered so far: (i) tranches with di erent maturities modeled in a consistent way, (ii) a portfolio with di erent rating buckets, relaxing the assumption of a large homogeneous portfolio, and (iii) di erent correlation regimes. The regime-switching component of the proposed Crash-NIG copula model is especially important in view of the current credit crisis. We also introduce liquidity premiums into the Crash-NIG copula model and show that the actual credit crisis is substantially driven by liquidity e ects.      «

It is well known that the one-factor copula models are very useful for risk management and measurement applications involving the generation of scenarios for the complete uni- verse of risk factors and the inclusion of CDO structures in a portfolio context. For this objective, it is necessary to have a simple and fast model that is also consistent with the scenario simulation framework. In this paper we present three extensions of the NIG one- factor copula model which jointly have not been cons...     »