CDO Pricing with Copulae
AbstractModeling the portfolio credit risk is one of the crucial issues of the last years in the financial problems. We propose the valuation model of Collateralized Debt Obligations based on a one- and two-parameter copula and default intensities estimated from market data. The presented method is used to reproduce the spreads of the iTraxx Europe tranches. The two-parameter model incorporates the fact that the risky assets of the CDO pool are chosen from six different industry sectors. The dependency among the assets from the same group is described with the higher value of the copula parameter, otherwise the lower value of the parameter is ascribed. Our approach outperforms the standard market pricing procedure based on the Gaussian distribution.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2009-013.
Length: 12 pages
Date of creation: Mar 2009
Date of revision:
CDO; CDS; multifactor models; multivariate distributions; Copulae; correlation smile;
Find related papers by JEL classification:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-18 (All new papers)
- NEP-FMK-2009-04-18 (Financial Markets)
- NEP-RMG-2009-04-18 (Risk Management)
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Elsevier, vol. 85(1), pages 14-24, September.
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Tinbergen Institute Discussion Papers
08-090/2, Tinbergen Institute, revised 06 Apr 2009.
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