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Copula sensitivity in collateralized debt obligations and basket default swaps

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  • Davide Meneguzzo
  • Walter Vecchiato

Abstract

This article empirically faces the lively debate over the choice of an appropriate copula function to be used to price and risk monitor some credit derivatives products. We consider the explicit pricing of collateralized debt obligations and basket default swaps, and empirically examine these credit derivatives within the copula framework. The results support in particular the choice of the T‐copula because of its greater flexibility in capturing the tail dependence. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:37–70, 2004

Suggested Citation

  • Davide Meneguzzo & Walter Vecchiato, 2004. "Copula sensitivity in collateralized debt obligations and basket default swaps," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(1), pages 37-70, January.
    • Handle: RePEc:wly:jfutmk:v:24:y:2004:i:1:p:37-70
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    Cited by:

    1. Sylvain Prado, 2009. "Hedging residual value risk using derivatives," Working Papers hal-04140859, HAL.
    2. Kole, Erik & Koedijk, Kees & Verbeek, Marno, 2007. "Selecting copulas for risk management," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2405-2423, August.
    3. Dianfa Chen & Jun Deng & Jianfen Feng & Bin Zou, 2017. "An Explicit Default Contagion Model and Its Application to Credit Derivatives Pricing," Papers 1706.06285, arXiv.org, revised Aug 2018.
    4. Almeida, Carlos & Czado, Claudia, 2012. "Efficient Bayesian inference for stochastic time-varying copula models," Computational Statistics & Data Analysis, Elsevier, vol. 56(6), pages 1511-1527.
    5. H. Kent Baker & Satish Kumar & Nitesh Pandey, 2021. "Forty years of the Journal of Futures Markets: A bibliometric overview," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(7), pages 1027-1054, July.
    6. Liu, Xiaochun, 2015. "Modeling time-varying skewness via decomposition for out-of-sample forecast," International Journal of Forecasting, Elsevier, vol. 31(2), pages 296-311.
    7. Mario Cerrato & John Crosby & Minjoo Kim & Yang Zhao, 2015. "Correlated Defaults of UK Banks: Dynamics and Asymmetries," Working Papers 2015_24, Business School - Economics, University of Glasgow.
    8. Ouyang, Ruolan & Chen, Xiang & Fang, Yi & Zhao, Yang, 2022. "Systemic risk of commodity markets: A dynamic factor copula approach," International Review of Financial Analysis, Elsevier, vol. 82(C).
    9. Duy Duong & Toan Luu Duc Huynh, 2020. "Tail dependence in emerging ASEAN-6 equity markets: empirical evidence from quantitative approaches," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-26, December.
    10. See-Woo Kim & Yong-Ki Ma & Ciprian Necula, 2023. "Modeling Tail Dependence Using Stochastic Volatility Model," Computational Economics, Springer;Society for Computational Economics, vol. 62(1), pages 129-147, June.
    11. E. Petrova A. & Е. Петрова А., 2014. "Оценка Риска Остаточной Стоимости Секьюритизированного Пула Активов Оперативного Лизинга // A Securitized Pool Of Operating Lease Assets And Its Residual Value Risk Evaluation," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, issue 3, pages 127-138.
    12. Петрова Екатерина Александровна, 2014. "Оценка Риска Остаточной Стоимости Секьюритизированного Пула Активов Оперативного Лизинга," Вестник Финансового университета, CyberLeninka;Федеральное государственное образовательное бюджетное учреждение высшего профессионального образования «Финансовый университет при Правительстве Российской Федерации» (Финансовый университет), issue 3, pages 127-138.
    13. Ouyang, Ruolan & Zhang, Xuan, 2020. "Financialization of agricultural commodities: Evidence from China," Economic Modelling, Elsevier, vol. 85(C), pages 381-389.
    14. Okhrin, Ostap & Xu, Ya Fei, 2017. "A comparison study of pricing credit default swap index tranches with convex combination of copulae," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 193-217.

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