Why did CPDOs fail? An analysis focused on credit spread modeling
AbstractIn this paper we propose a model to evaluate the performance of a Constant Proportion Debt Obligation (CPDO) and assess its rating. We model credit spread evolution in a HJM framework and default events for CPDO are generated by using a reduced form approach. Implementing a numerical algorithm that simulates the strategy of a CPDO, we obtain a rating for CPDO by using Monte Carlo simulations. We find a rating inferior to the one assigned by rating agencies. Using our model for credit spread dynamics, the revealed default probability for CPDO could have been predicted.
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Bibliographic InfoPaper provided by Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia in its series Quaderni DSEMS with number 05-2010.
Date of creation: Jun 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-06 (All new papers)
- NEP-CMP-2010-11-06 (Computational Economics)
- NEP-FMK-2010-11-06 (Financial Markets)
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