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A Dynamic Affine Factor Model for the Pricing of Collateralized Debt Obligations

Author

Listed:
  • Zehra Eksi

    (Vienna University of Economics and Business, Institute for Statistics and Mathematics)

  • Damir Filipović

    (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute)

Abstract

We propose an affine two-factor model for the pricing of single-tranche collateralized debt obligations by following the general top-down framework introduced in Filipovic et al. [2011]. Apart from being analytically tractable, this model has the feature that it incorporates a catastrophic risk component as a tool to capture the dynamics of super-senior tranches. To appraise the actual performance of the model we run an estimation analysis based on the quasi-maximum likelihood approach in conjunction with the Kalman filter. Our findings suggest that the two-factor model is successful in describing the iTraxx Europe data set which covers the time period including the recent credit crisis.

Suggested Citation

  • Zehra Eksi & Damir Filipović, 2013. "A Dynamic Affine Factor Model for the Pricing of Collateralized Debt Obligations," Swiss Finance Institute Research Paper Series 13-09, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1309
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    More about this item

    Keywords

    collateralized debt obligations; single-tranche CDO; affine term-structure of credit spreads; catastrophic risk;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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