Pricing Synthetic CDOs Using a Three Regime Random-Factor-Loading Model
AbstractSynthetic Collateralized Debt Obligations (CDOs) were among the driving forces of the rapid growth of the market for credit derivatives in recent years. Possibly the most popular model beside the Gaussian copula for pricing CDO tranches is the Random-Factor-Loading-Model of Andersen and Sidenius (2005). We extend this model by allowing more than two regimes of default correlations. The model is calibrated to market spreads at times of financial distress and during calm periods. For both points in time the model correlation skews are similar to the steep skews observed in the market and lead to an improvement to the standard Random-Factor-Loading-Model.
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Bibliographic InfoPaper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0317.
Length: 28 pages
Date of creation: Feb 2012
Date of revision:
Find related papers by JEL classification:
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-21 (All new papers)
- NEP-BAN-2012-03-21 (Banking)
- NEP-FMK-2012-03-21 (Financial Markets)
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.:
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