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Hedging tranches index products : illustration of model dependency

Author

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  • Dominique Guegan

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Julien Houdain

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

In this paper, index tranches'properties and several hedging strategies are discussed. Model risk and correlation risk are analysed through the study of the efficiency of several factor based copula models, like the Gaussian, the double-t and the double NIG using implied correlation and a particular NIG one factor model, using historical data in terms of hedging capabilities.

Suggested Citation

  • Dominique Guegan & Julien Houdain, 2006. "Hedging tranches index products : illustration of model dependency," Post-Print halshs-00179325, HAL.
    • Handle: RePEc:hal:journl:halshs-00179325
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00179325
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    References listed on IDEAS

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    1. Lillestöl, Jostein, 2002. "Some crude approximation, calibration and estimation procedures for NIG-variates," SFB 373 Discussion Papers 2002,85, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    2. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453, World Scientific Publishing Co. Pte. Ltd..
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    4. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409, World Scientific Publishing Co. Pte. Ltd..
    5. Lars Forsberg & Tim Bollerslev, 2002. "Bridging the gap between the distribution of realized (ECU) volatility and ARCH modelling (of the Euro): the GARCH-NIG model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 535-548.
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    7. Lillestøl, Jostein, 2000. "Bayesian estimation of NIG-parameters by Markov Chain Monte Carlo Methods," SFB 373 Discussion Papers 2000,112, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    8. Jeffery D Amato & Jacob Gyntelberg, 2005. "CDS index tranches and the pricing of credit risk correlations," BIS Quarterly Review, Bank for International Settlements, March.
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    Keywords

    CDO; Factor models; NIG distribution;
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