CDO Surfaces Dynamics
AbstractModelling the dynamics of credit derivatives is a challenging task in finance and economics. The recent crisis has shown that the standard market models fail to measure and forecast financial risks and their characteristics. This work studies risk of collateralized debt obligations (CDOs) by investigating the evolution of tranche spread surfaces and base correlation surfaces using a dynamic semiparametric factor model (DSFM). The DSFM offers a combination of flexible functional data analysis and dimension reduction methods, where the change in time is linear but the shape is nonparametric. The study provides an empirical analysis based on iTraxx Europe tranches and proposes an application to curve trading strategies. The DSFM allows us to describe the dynamics of all the tranches for all available maturities and series simultaneously which yields better understanding of the risk associated with trading CDOs and other structured products.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2013-032.
Length: 33 pages
Date of creation: Jul 2013
Date of revision:
base correlation; collateralized debt obligation; curve trade; dynamic factor model; semiparametric model;
Find related papers by JEL classification:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-20 (All new papers)
- NEP-ECM-2013-07-20 (Econometrics)
- NEP-RMG-2013-07-20 (Risk Management)
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