Credit Risk Contagion Model Based on Logarithmic Gauss Distribution and CDO Pricing

Existing default contagion model cannot describe the leap attenuation features of the effects of credit default of one company on another company with time lapse. Thus the logarithmic Gauss decay function is introduced into the intensity model of credit default, and logarithmic Gauss attenuation model of credit risk contagion is constructed that contain a biphasic or ring features between two companies. The survival function of two companies and the pricing of CDO are investigated under this model. Numerical examples show significant positive correlation that relevant parameters in the credit risk contagion model for CDO prices.