Marking to Market Credit Derivatives on Simultaneous Credit Events

Monday, March 20, 2017 - 3:00pm - 4:00pm EDT

You are cordially invited to attend the FRE Lecture.

Our invited guest is Sabrina Mulinacci, Associate Professor of Mathematical Methods for Economics, Actuarial Sciences and Finance at the Department of Statistics of the University of Bologna, Italy who will present a lecture on the following topic:

Title

Marking to Market Credit Derivatives on Simultaneous Credit Events

Abstract

We propose a multivariate distribution of default times with exponential marginals and unobservable components with exponential occurrence times and Archimedean dependence. The distribution is called GMO (Gumbel-Marshall-Olkin) distribution because it is an extension of the standard Marshall-Olkin setting in which the dependence structure of the unobserved components is given by the Gumbel copula, the only one able to preserve marginal exponential distributions for the observed default times. We apply the model to price and hedge a credit derivative written on the simultaneous default of a basket of names. In particular, we derive an easy static hedge for the pure Marshall-Olkin case, that is with independent unobserved components. We show how to estimate and validate the model on actual CDS data with an application to a set of European banks, divided by country.
In order to weaken the exchangeability feature of the Archimedean setting we further consider a completely asymmetric dependence structure for unobserved components allowing for the case in which each obligor can affect in a different way the occurrence of the simultaneous default event. The resulting model is well suited to be applied to clusters of banks classified as SIFI (Systemically Important Financial Institutions) in order to identify their systemic riskiness.

Based on joint work with Umberto Cherubini

Bio

Sabrina Mulinacci is an Associate Professor of Mathematical Methods for Economics, Actuarial Sciences and Finance at the Department of Statistics of the University of Bologna, Italy. Prior to this appointment, she was an Associate Professor at the Catholic University of Milan (Italy) and received a PhD in Mathematics at the University of Pisa (Italy).  Her research interests and publications mainly pertain to probabilistic methods applied to mathematical finance, with special focus on American options and on copula methods applied to risk management.

We look forwarding to seeing you there. Refreshments will be served.