Research Of Prepayment Default Correlation Based On Copula Function

Nowadays, the housing mortgage loans has become a very important part of the bank loans assets in China as its rapid development, and played an important role in optimizing loan structure、reducing credit ris、raising proceeds, and had more and more important position in the bank’s assets and earnings.As the housing mortgage loans allows the borrower to repay before the maturity, thus there may be prepayment risk. Prepayment risk must be bringing some losses and risks. The intrinsic quality of prepayment is breaking an agreement, therefore, early repayment is a risk of default. The measurement of such risk can bring some important practical significance for the bank management.An important aspect of the measure of defaulting risk is default correlation. Degree of correlation and dependency structure are described accurately is the important prerequisite of risk management. In terms of asset management, joint default behavior causes losses more likely and huger, as the existence of default correlation, so modern commercial banks are no longer concerned with single asset default risk only, but put their focus on the risk management of loan portfolio.This study is to use a new method to measure the relevance of early default risk, measure a combination of four categories of risk among borrowers, which are divided by qualifications.As the joint risk is not equal to weighting of single risk simply, we should be consider the correlation between credit assets and the dispersion effect of risk.The current measure of default correlation is linear correlation. As practice has proved that the linear correlation exists faults and is not enough to portray heavy-tailed of default correlation in reality. Asset default correlation will be strong in the case of market conditions is deteriorating, that means the probability of joint default is increasing.What to do can be with the actual situation? How to measure the risk of default accurately in order to determine the best combination of loan structure? Copula theory made the problem be resolved.Copula functions are new tools in the financial field, which is began to measure the risk associated since the end of the last century. It has a flexible form. Copula Methods have application in default correlation is an emerging field, which has good prospects, such as the selection criteria of Copula function、high-dimensional Copula function and simple structure model. The research introduces the Copula function into default correlation,Through the choice of the Copula function, one-parameter Archimedean Copula function as the connection function for asset pool, concluded:borrowers are more likely to repay the loan in the term before medium of Maturity Date. VAR value basing on Copula functions are less than that under a separate category, which means the interaction between the variables education, offset some of the single VAR values. This indicates the effectiveness of Copula function in credit portfolio risk measure for commercial banks.Copula method is applied to measure the default correlation of prepayment risk, which is to look forward to benefit the commercial banks in loan portfolio management and risk management.