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CDO term structure modelling with Levy processes and the relation to market models


  • Thorsten Schmidt
  • Jerzy Zabczyk


This paper considers the modelling of collateralized debt obligations (CDOs). We propose a top-down model via forward rates generalizing Filipovi\'c, Overbeck and Schmidt (2009) to the case where the forward rates are driven by a finite dimensional L\'evy process. The contribution of this work is twofold: we provide conditions for absence of arbitrage in this generalized framework. Furthermore, we study the relation to market models by embedding them in the forward rate framework in spirit of Brace, Gatarek and Musiela (1997).

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  • Thorsten Schmidt & Jerzy Zabczyk, 2010. "CDO term structure modelling with Levy processes and the relation to market models," Papers 1007.1706,, revised Dec 2010.
  • Handle: RePEc:arx:papers:1007.1706

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    References listed on IDEAS

    1. Miltersen, Kristian R & Sandmann, Klaus & Sondermann, Dieter, 1997. " Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates," Journal of Finance, American Finance Association, vol. 52(1), pages 409-430, March.
    2. Joanne Kennedy & Phil Hunt & Antoon Pelsser, 2000. "Markov-functional interest rate models," Finance and Stochastics, Springer, vol. 4(4), pages 391-408.
    3. Dothan, L. Uri, 1978. "On the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 59-69, March.
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