Pricing k-th to default swaps in a Lévy-time framework

A multivariate credit-risk model is presented which introduces dependence to individual default events via a stochastic time-change. This model is applied to the pricing of k-th to default swaps to demonstrate its practical value. Despite the freedom in specifying the term structures of individual default probabilities it is still possible to present closed-form solutions for the resulting portfolio-loss distribution. Hence, the model can be used to simultaneously explain spreads of individual CDS and k-th to default swaps. Moreover, the stochastic time-change introduces a dynamic component which allows for the consistent pricing of credit derivatives across all maturities. Qualitative and quantitative results on the dependence structure include the induced copula of the default times, the pairwise default correlation, the lower-extremal dependence coefficient, and the distribution of the k-th default time.     «

A multivariate credit-risk model is presented which introduces dependence to individual default events via a stochastic time-change. This model is applied to the pricing of k-th to default swaps to demonstrate its practical value. Despite the freedom in specifying the term structures of individual default probabilities it is still possible to present closed-form solutions for the resulting portfolio-loss distribution. Hence, the model can be used to simultaneously explain spreads of individual C...     »