Mark-to-model for cash CDOs through indifference pricing
AbstractWe define a mark-to-model for cash collateralized debt obligations based on an indifference price with an exponential utility function. The risk model is driven by a one-factor Gamma process representing the cumulated default intensity of the collateral, calibrated using historical data. The risk aversion can be calibrated using liquid instruments (bonds). Using a Monte-Carlo method, we can produce cash flow distributions in accordance with the specific waterfall of the product. We then compute the indifference price using these distributions. We provide examples with comparisons with market prices.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Quantitative Finance.
Volume (Year): 12 (2012)
Issue (Month): 1 (September)
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Web page: http://www.tandfonline.com/RQUF20
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