On Default Correlation And Pricing Of Collateralized Debt Obligation By Copula Functions
AbstractDefault correlation is the key point for the pricing of multi-name credit derivatives. In this paper, we apply copulas to characterize the dependence structure of defaults, determine the joint default distribution, and give the price for a specific kind of multi-name credit derivative — collateralized debt obligation (CDO). We also analyze two important factors influencing the pricing of multi-name credit derivatives, recovery rates and copula function. Finally, we apply Clayton copula, in a numerical example, to simulate default times taking specific underlying recovery rates and average recovery rates, then price the tranches of a given CDO and then analyze the results.
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Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Information Technology and Decision Making.
Volume (Year): 05 (2006)
Issue (Month): 03 ()
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Web page: http://www.worldscinet.com/ijitdm/ijitdm.shtml
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- Philip Messow, 2012. "Pricing Synthetic CDOs Using a Three Regime Random-Factor-Loading Model," Ruhr Economic Papers 0317, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
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