CREDIT RISK MODELS IV: UNDERSTANDING AND PRICING CDOs
Some investors in the Collateralized Debt Obligations (CDOs) market have been publicly accused of not fully understanding the risks and dynamics of these products. They won't have an excuse any more. This report explains the mechanics of CDOs: their implied cash flows, the variables affecting those cash flows, their pricing, the sensitivity of CDO price to those variables, the functioning of the markets where they are traded, their different types, the conventions used for trading CDOs,...We built our description of CDOs pricing upon the Vasicek asymptotic single factor model because of its simplicity and the insights it provides regarding the pricing of CDOs. Additionally, we provide an extensive and updated review of the literature which extends the Vasicek model by relaxing its, somehow restrictive, assumptions in order to build more realistic and, as a consequence, more complicated CDO princing models.
|Date of creation:||Apr 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.cemfi.es/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Koopman, Siem Jan & Lucas, AndrÃ©, 2008.
"A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 26, pages 510-525.
- Siem Jan Koopman & Andr� Lucas & Robert Daniels, 2005. "A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk," Tinbergen Institute Discussion Papers 05-060/4, Tinbergen Institute.
- Siem Jan Koopman & Andr� Lucas & Robert J. Daniels, 2005. "A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk," DNB Working Papers 055, Netherlands Central Bank, Research Department.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Michael S. Gibson, 2004. "Understanding the risk of synthetic CDOs," Finance and Economics Discussion Series 2004-36, Board of Governors of the Federal Reserve System (U.S.).
- Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-67, May.
- Merton, Robert C, 1974.
"On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,"
Journal of Finance,
American Finance Association, vol. 29(2), pages 449-70, May.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Repullo, Rafael & Suarez, Javier, 2004.
"Loan pricing under Basel capital requirements,"
Journal of Financial Intermediation,
Elsevier, vol. 13(4), pages 496-521, October.
- Gordy, Michael B., 2003.
"A risk-factor model foundation for ratings-based bank capital rules,"
Journal of Financial Intermediation,
Elsevier, vol. 12(3), pages 199-232, July.
- Michael B. Gordy, 2002. "A risk-factor model foundation for ratings-based bank capital rules," Finance and Economics Discussion Series 2002-55, Board of Governors of the Federal Reserve System (U.S.).
- Jeffery D Amato & Jacob Gyntelberg, 2005. "CDS index tranches and the pricing of credit risk correlations," BIS Quarterly Review, Bank for International Settlements, March.
- Thomas C. Wilson, 1998. "Portfolio credit risk," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 71-82.
- Gunter Franke & Jan Pieter Krahnen, 2007.
"Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations,"
in: The Risks of Financial Institutions, pages 603-634
National Bureau of Economic Research, Inc.
- Guenter Franke & Jan Pieter Krahnen, 2005. "Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations," NBER Working Papers 11741, National Bureau of Economic Research, Inc.
- Franke, Günter & Krahnen, Jan Pieter, 2005. "Default risk sharing between banks and markets: The contribution of collateralized debt obligations," CFS Working Paper Series 2005/06, Center for Financial Studies (CFS).
- Günter Franke & Jan Pieter Krahnen, 2005. "Default risk sharing between banks and markets: the contribution of collateralized debt obligations," CoFE Discussion Paper 05-04, Center of Finance and Econometrics, University of Konstanz.
- Bank for International Settlements, 2005. "The role of ratings in structured finance: issues and implications," CGFS Papers, Bank for International Settlements, number 23, Autumn.
- Daniel Covitz & Song Han, 2004. "An empirical analysis of bond recovery rates: exploring a structural view of default," Finance and Economics Discussion Series 2005-10, Board of Governors of the Federal Reserve System (U.S.).
- Abel Elizalde & Rafael Repullo, 2004.
"Economic And Regulatory Capital. What Is The Difference?,"
- Elizalde, Abel & Repullo, Rafael, 2004. "Economic and Regulatory Capital: What is the Difference?," CEPR Discussion Papers 4770, C.E.P.R. Discussion Papers.
- Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
- Joost Driessen, 2005. "Is Default Event Risk Priced in Corporate Bonds?," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 165-195.
- Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
When requesting a correction, please mention this item's handle: RePEc:cmf:wpaper:wp2006_0608. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Araceli Requerey)
If references are entirely missing, you can add them using this form.