Consistent Valuation of Bespoke CDO Tranches
AbstractThis paper describes a consistent and arbitrage-free pricing methodology for bespoke CDO tranches. The proposed method is a multi-factor extension to the (Li 2009) model, and it is free of the known flaws in the current standard pricing method of base correlation mapping. This method assigns a distinct market factor to each liquid credit index and models the correlation between these market factors explicitly. A low-dimensional semi-analytical Monte Carlo is shown to be very efficient in computing the PVs and risks of bespoke tranches. Numerical examples show that resulting bespoke tranche prices are generally in line with the current standard method of base correlation with TLP mapping. Practical issues such as model deltas and quanto adjustment are also discussed as numerical examples.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1004.1758.
Date of creation: Apr 2010
Date of revision:
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Igor Halperin, 2009. "Implied Multi-Factor Model for Bespoke CDO Tranches and other Portfolio Credit Derivatives," Papers 0910.2696, arXiv.org.
- Friedel Epple & Sam Morgan & Lutz Schloegl, 2007. "Joint Distributions Of Portfolio Losses And Exotic Portfolio Products," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(04), pages 733-748.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If references are entirely missing, you can add them using this form.