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Joint Distributions Of Portfolio Losses And Exotic Portfolio Products

Author

Listed:
  • FRIEDEL EPPLE

    (Lehman Brothers, 25 Bank Street, London E14 5LE, United Kingdom)

  • SAM MORGAN

    (Lehman Brothers, 25 Bank Street, London E14 5LE, United Kingdom)

  • LUTZ SCHLOEGL

    (Lehman Brothers, 25 Bank Street, London E14 5LE, United Kingdom)

Abstract

The pricing of exotic portfolio products, e.g. path-dependent CDO tranches, relies on the joint probability distribution of portfolio losses at different time horizons. We discuss a range of methods to construct the joint distribution in a way that is consistent with market prices of vanilla CDO tranches. As an example, we show how our loss-linking methods provide estimates for the breakeven spreads of forward-starting tranches. .

Suggested Citation

  • Friedel Epple & Sam Morgan & Lutz Schloegl, 2007. "Joint Distributions Of Portfolio Losses And Exotic Portfolio Products," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(04), pages 733-748.
    • Handle: RePEc:wsi:ijtafx:v:10:y:2007:i:04:n:s0219024907004354
    DOI: 10.1142/S0219024907004354
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    Cited by:

    1. Areski Cousin & Diana Dorobantu & Didier Rullière, 2013. "An extension of Davis and Lo's contagion model," Quantitative Finance, Taylor & Francis Journals, vol. 13(3), pages 407-420, February.
    2. Yadong Li, 2010. "Consistent Valuation of Bespoke CDO Tranches," Papers 1004.1758, arXiv.org.
    3. Yadong Li, 2010. "A Dynamic Correlation Modelling Framework with Consistent Stochastic Recovery," Papers 1004.3758, arXiv.org.

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