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Pricing And Hedging Of Cdo-Squared Tranches By Using A One Factor Lévy Model

Author

Listed:
  • FLORENCE GUILLAUME

    (Department of Mathematics, K. U. Leuven, Celestijnenlaan 200 B, B-3001 Leuven, Belgium)

  • PHILIPPE JACOBS

    (Value and Risk Management Department, KBC Group, Belgium)

  • WIM SCHOUTENS

    (Department of Mathematics, K. U. Leuven, Celestijnenlaan 200 B, B-3001 Leuven, Belgium)

Abstract

This paper provides a comparison of the exponential copula Lévy model with the classical Gaussian copula model for the pricing of CDO-squared tranches. Several approximations of the recursive approach are considered: a full Monte Carlo approximation, a multivariate Normal approximation of the joint inner CDO loss distribution and a multivariate Poisson approximation of the joint number of defaults affecting the inner CDOs. More particularly, a sensitivity analysis is carried out for three particular days characterized by a low, medium and high value of the quoted iTraxx and CDX index spreads. Moreover, this paper features a comparison of the exponential Lévy and Gaussian Deltas under the multivariate Normal approximation for a period extended from 20 September 2007 until 13 February 2008. The Deltas are computed with respect to a weighted and unweighted version of the CDS pool as well as with respect to another CDO-squared tranche.

Suggested Citation

  • Florence Guillaume & Philippe Jacobs & Wim Schoutens, 2009. "Pricing And Hedging Of Cdo-Squared Tranches By Using A One Factor Lévy Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(05), pages 663-685.
    • Handle: RePEc:wsi:ijtafx:v:12:y:2009:i:05:n:s0219024909005397
    DOI: 10.1142/S0219024909005397
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    Cited by:

    1. Damien Ackerer & Thibault Vatter, 2016. "Dependent Defaults and Losses with Factor Copula Models," Papers 1610.03050, arXiv.org, revised Jan 2018.
    2. Ackerer Damien & Vatter Thibault, 2017. "Dependent defaults and losses with factor copula models," Dependence Modeling, De Gruyter, vol. 5(1), pages 375-399, December.

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