CDO Pricing with Copulae
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.
|Date of creation:||Mar 2009|
|Date of revision:|
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- Tijmen DaniÃ«ls & Henk Jager & Franc Klaassen, 2009.
"Defending Against Speculative Attacks,"
SFB 649 Discussion Papers
SFB649DP2009-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- 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.
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