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Pricing of CDOs based on the multivariate Wang transform

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  • Kijima, Masaaki
  • Motomiya, Shin-ichi
  • Suzuki, Yoichi
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    Abstract

    This paper extends the one-factor Gaussian copula model, the standard market model for valuing CDOs, based on the multivariate Wang transform. Unlike the existing models, our model calibrates the parameter associated with a risk adjustment for default threshold, not correlation parameter, which always exists and is unique for any market price of CDO tranche. A Student t-copula model is also considered within the same framework to describe a fat-tail distribution observed in the actual market. Through numerical experiments, it is shown that our model provides a better fit to the market data compared with the existing models.

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    File URL: http://www.sciencedirect.com/science/article/B6V85-506H0K8-1/2/e64ac18dcbbcc8cf2243abaebca05b80
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 34 (2010)
    Issue (Month): 11 (November)
    Pages: 2245-2258
    Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
    Handle: RePEc:eee:dyncon:v:34:y:2010:i:11:p:2245-2258

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    Web page: http://www.elsevier.com/locate/jedc

    For corrections or technical questions regarding this item, or to correct its listing, contact: (Jeroen Loos).

    Related research

    Keywords: One-factor Gaussian copula model Merton's structural model Multivariate Wang transform Student t copula;

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