Correlation Structures of Correlated Binomial Models and Implied Default Distribution

Abstract

We show how to analyze and interpret the correlation structures, the conditional expectation values and correlation coefficients of exchangeable Bernoulli random variables. We study implied default distributions for the iTraxx-CJ tranches and some popular probabilistic models, including the Gaussian copula model, Beta binomial distribution model and long-range Ising model. We interpret the differences in their profiles in terms of the correlation structures. The implied default distribution has singular correlation structures, reflecting the credit market implications. We point out two possible origins of the singular behavior.

16 pages, 7 figures

References in corpus (9)

• Large-scale structure of a nation-wide production network
• Physics, Stability and Dynamics of Supply Networks
• Correlated Binomial Models and Correlation Structures
• A simple model of bank bankruptcies
• Criticality in a model of banking crises
• Networks of companies and branches in Poland
• Evaluation of Tranche in Securitization and Long-range Ising Model
• Infectious Default Model with Recovery and Continuous Limit
• Moody's Correlated Binomial Default Distributions for Inhomogeneous Portfolios

Cited by in corpus (6)

• Phase transition in the Bayesian estimation of the default portfolio
• Infectious Default Model with Recovery and Continuous Limit
• Moody's Correlated Binomial Default Distributions for Inhomogeneous Portfolios
• Parameter estimation of default portfolios using the Merton model and Phase transition
• From the multi-terms urn model to the self-exciting negative binomial distribution and Hawkes processes
• Multi-Dimensional self-exciting NBD process and Default portfolios