Time: 1.00 - 2.00pm Venue: Room 3.21, Old Building, LSE (map)
Speaker: Umberto Cherubini (Università Di Bologna)
Seminar Title: Credit Indexes and Simultaneous Defaults
Abstract: We address the problem of estimating and hedging the credit risk of systems in which the joint default probability is singular, so that the simultaneous default of baskets of obligors has positive probability. The interest in singular multivariate distributions is motivated by macro-prudential issues and central clearing counter party risk.  We address the problem using common shock models and we show that under some assumptions the probability of simultaneous defaults is proportional to the credit index of the names involved in the set. We provide an example of the impact of the singularity bias on the pricing and hedging of multi-name credit derivatives, namely first-to-default swaps. We illustrate how to specify the common shock model and back out a measure of the singular component using  a sample of banks during the European crisis.