IDEAS home Printed from https://ideas.repec.org/p/hum/wpaper/sfb649dp2009-013.html
   My bibliography  Save this paper

CDO Pricing with Copulae

Author

Listed:
  • Barbara Choros
  • Wolfgang Härdle
  • Ostap Okhrin

Abstract

Modeling the portfolio credit risk is one of the crucial issues of the last years in the financial problems. We propose the valuation model of Collateralized Debt Obligations based on a one- and two-parameter copula and default intensities estimated from market data. The presented method is used to reproduce the spreads of the iTraxx Europe tranches. The two-parameter model incorporates the fact that the risky assets of the CDO pool are chosen from six different industry sectors. The dependency among the assets from the same group is described with the higher value of the copula parameter, otherwise the lower value of the parameter is ascribed. Our approach outperforms the standard market pricing procedure based on the Gaussian distribution.

Suggested Citation

  • Barbara Choros & Wolfgang Härdle & Ostap Okhrin, 2009. "CDO Pricing with Copulae," SFB 649 Discussion Papers SFB649DP2009-013, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    • Handle: RePEc:hum:wpaper:sfb649dp2009-013
    as

    Download full text from publisher

    File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2009-013.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Daniëls, Tijmen R. & Jager, Henk & Klaassen, Franc, 2011. "Currency crises with the threat of an interest rate defence," Journal of International Economics, Elsevier, vol. 85(1), pages 14-24, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Roland Strausz, 2009. "The Political Economy of Regulatory Risk," SFB 649 Discussion Papers SFB649DP2009-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Michał Grajek & Lars-Hendrik Röller, 2012. "Regulation and Investment in Network Industries: Evidence from European Telecoms," Journal of Law and Economics, University of Chicago Press, vol. 55(1), pages 189-216.
    3. Barbara Choroś & Wolfgang Härdle & Ostap Okhrin, 2009. "CDO and HAC," SFB 649 Discussion Papers SFB649DP2009-038, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. Maria Grith & Wolfgang Härdle & Juhyun Park, 2009. "Shape invariant modelling pricing kernels and risk aversion," SFB 649 Discussion Papers SFB649DP2009-041, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stefan Ried, 2009. "Putting Up a Good Fight: The Galí-Monacelli Model versus “The Six Major Puzzles in International Macroeconomicsâ€," SFB 649 Discussion Papers SFB649DP2009-020, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Busch Ulrike & Nautz Dieter, 2010. "Controllability and Persistence of Money Market Rates along the Yield Curve: Evidence from the Euro Area," German Economic Review, De Gruyter, vol. 11(3), pages 367-380, August.
    3. Katja Hanewald & Thomas Post & Helmut Gründl, 2011. "Stochastic Mortality, Macroeconomic Risks and Life Insurer Solvency," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 36(3), pages 458-475, July.
    4. Erler, Alexander & Bauer, Christian & Herz, Bernhard, 2014. "Defending against speculative attacks – It is risky, but it can pay off," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 309-330.
    5. Roland Strausz, 2009. "The Political Economy of Regulatory Risk," SFB 649 Discussion Papers SFB649DP2009-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    6. Erler, Alexander & Bauer, Christian & Herz, Bernhard, 2015. "To intervene, or not to intervene: Monetary policy and the costs of currency crises," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 432-456.
    7. Bauer, Christian & Ernstberger, Philip, 2014. "The Dynamics of Currency Crises - Results from Intertemporal Optimization and Viscosity Solutions," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100300, Verein für Socialpolitik / German Economic Association.
    8. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126.
    9. Michał Grajek & Lars-Hendrik Röller, 2012. "Regulation and Investment in Network Industries: Evidence from European Telecoms," Journal of Law and Economics, University of Chicago Press, vol. 55(1), pages 189-216.
    10. Mahdi Yazdani & Mohammad Nikzad, 2021. "Output Losses from Currency Crises and the Role of Central Bank," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(3), pages 79-97.
    11. Daniëls, Tijmen R. & Dönges, Jutta & Heinemann, Frank, 2013. "Crossing network versus dealer market: Unique equilibrium in the allocation of order flow," European Economic Review, Elsevier, vol. 62(C), pages 41-57.
    12. Franc Klaassen & Kostas Mavromatis, 2016. "Interest Rate Rules, Exchange Market Pressure, and Successful Exchange Rate Management," Tinbergen Institute Discussion Papers 16-034/VI, Tinbergen Institute.
    13. Maria Grith & Wolfgang Härdle & Juhyun Park, 2009. "Shape invariant modelling pricing kernels and risk aversion," SFB 649 Discussion Papers SFB649DP2009-041, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    14. Barbara Choroś & Wolfgang Härdle & Ostap Okhrin, 2009. "CDO and HAC," SFB 649 Discussion Papers SFB649DP2009-038, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    15. Jon Frost, 2015. "A theory of bazookas; or, "when (and when not) to use large-scale official sector support"," DNB Working Papers 479, Netherlands Central Bank, Research Department.
    16. Nicolás Oviedo, 2022. "Deficit fiscal y tipo de cambio fijo: racionalizando una combinacion insostenible," Young Researchers Working Papers 3, Universidad de San Andres, Departamento de Economia, revised Oct 2022.

    More about this item

    Keywords

    CDO; CDS; multifactor models; multivariate distributions; Copulae; correlation smile;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hum:wpaper:sfb649dp2009-013. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: RDC-Team (email available below). General contact details of provider: https://edirc.repec.org/data/sohubde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.