Stochastic model for correlated default patterns to price credit derivatives

Abstract

The motivation behind the project is the fact that while pricing credit derivative instruments, we have to consider that the risk associated with the underlying assets does not remain constant, but behaves stochastically. Hence, it is imperative that the models aimed at pricing such derivatives properly factor in this time-varying nature of the risk that the instrument is exposed to. When we mention risk, we particularly refer to that arising out of the possibility of default.