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

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  • Thorsten Schmidt
  • Jerzy Zabczyk

Abstract

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).

Suggested Citation

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