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Pricing of credit default index swap tranches with one-factor heavy-tailed copula models

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Author Info

  • Wang, Dezhong
  • Rachev, Svetlozar T.
  • Fabozzi, Frank J.

Abstract

In this paper, we provide two one-factor heavy-tailed copula models for pricing a collateralized debt obligation and credit default index swap tranches: (1) a one-factor double t distribution with fractional degrees of freedom copula model and (2) a one-factor double mixture distribution of t and Gaussian distribution copula model. A time-varying tail-fatness parameter is introduced in each model, allowing one to change the tail-fatness of the copula function continuously. Fitting our model to comprehensive market data, we find that a model with fixed tail-fatness cannot fit market data well over time. The two models that we propose are capable of fitting market data well over time when using a proper time-varying tail-fatness parameter. Moreover, we find that the time-varying tail-fatness parameters change dramatically over a one-year period.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 16 (2009)
Issue (Month): 2 (March)
Pages: 201-215

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Handle: RePEc:eee:empfin:v:16:y:2009:i:2:p:201-215

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

Related research

Keywords: Collateralized Debt Obligation Credit Default Swap Credit Default Index Swap Credit Default Index Swap Tranches;

References

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  1. Jeffery D Amato & Jacob Gyntelberg, 2005. "CDS index tranches and the pricing of credit risk correlations," BIS Quarterly Review, Bank for International Settlements, March.
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Citations

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Cited by:
  1. Zinna, Gabriele, 2013. "Sovereign default risk premia: Evidence from the default swap market," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 15-35.
  2. Hayette Gatfaoui, 2010. "Investigating the dependence structure between credit default swap spreads and the U.S. financial market," Annals of Finance, Springer, vol. 6(4), pages 511-535, October.
  3. Bedendo, Mascia & Campolongo, Francesca & Joossens, Elisabeth & Saita, Francesco, 2010. "Pricing multiasset equity options: How relevant is the dependence function?," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 788-801, April.

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