Dynamic hedging of synthetic CDO tranches with spread risk and default contagion
AbstractThe paper is concerned with the hedging of credit derivatives, in particular synthetic CDO tranches, in a dynamic portfolio credit risk model with spread risk and default contagion. The model is constructed and studied via Markov-chain techniques. We discuss the immunization of a CDO tranche against spread- and event risk in the Markov-chain model and compare the results with market-standard hedge ratios obtained in a Gauss copula model. In the main part of the paper we derive model-based dynamic hedging strategies and study their properties in numerical experiments.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 34 (2010)
Issue (Month): 4 (April)
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Web page: http://www.elsevier.com/locate/jedc
Dynamic hedging Portfolio credit risk Credit derivatives Incomplete markets Default contagion;
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