Abstract

BSLP is a two-dimensional dynamic model of interacting portfolio-level loss and loss intensity processes. It is constructed as a Markovian, short-rate intensity model, which facilitates fast lattice methods for pricing various portfolio credit derivatives such as tranche options, forward-starting tranches, leveraged super-senior tranches etc. A semiparametric model specification is used to achieve near perfect calibration to any set of consistent portfolio tranche quotes. The one-dimensional local intensity model obtained in the zero volatility limit of the stochastic intensity is useful in its own right for pricing non-standard index tranches by arbitrage-free interpolation. Opinions expressed in this paper are those of the authors, and do not necessarily reflect the view of

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