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Joined: Mon Feb 04, 2013 3:35 pm


Postby » Thu Jun 26, 2014 7:34 pm

84.3 Two bonds each have the same marginal (unconditional) probability of default (PD)
equal to 2.0%. If they are independent, their joint PD is 0.04% which is the product of 2.0%
multiplied by 2.0%. However, assume we employ a Gaussian copula to join two marginal
(unconditional) probabilities of default into a single bivariate function. If the correlation
parameter is 0.5, how will the copula-based joint PD compare to joint PD under
a) Less than 0.04%
b) Equal to 0.04%
c) Greater than 0.04%
d) Gaussian copula requires an additional parameter

Actual joint CDF (PD) is approximately 0.3381%; as correlation tends toward 1.0, joint PD
increased from 0.04% and tends toward 2.0%.
In regard to (D), this is false as the Gaussian copula depends only on the single correlation

Can anyone explain how they arrived this answer .3381% and .004%

Source BT

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