A Top Down Approach to Multi-Name Credit
Feb 1, 2010
Intensity based models of the portfolio loss process that are specified without reference to the portfolio constituents lead to tractable credit derivatives valuation formulae and accurate tranche market calibrations. We show how to complement these models with random thinning, which decomposes the portfolio loss process into single name loss processes. Random thinning facilitates consistent pricing and calibration of single- and multi-name securities and estimation of single name hedges.