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Copula Dynamics in CDOs

Author

Listed:
  • Barbara Choros-Tomczyk
  • Wolfgang Karl Härdle
  • Ludger Overbeck

Abstract

Values of tranche spreads of collateralized debt obligations (CDOs) are driven by the joint default performance of the assets in the collateral pool. The dependence between the names in the portfolio mainly depends on current economic conditions. Therefore, a correlation implied from tranches can be seen as a measure of the gen- eral health of the credit market. We analyse the European market of standardized CDOs using tranches of iTraxx index in the periods before and during the global financial crisis. We investigate the evolution of the correlations using different cop- ula models: the standard Gaussian, the NIG, the double-t, and the Gumbel copula model. After calibration of these models one obtains a time varying vector of pa- rameters. We analyse the dynamic pattern of these coefficients. That enables us to forecast future parameters and consequently calculate Value-at-Risk measures for iTraxx Europe tranches.

Suggested Citation

  • Barbara Choros-Tomczyk & Wolfgang Karl Härdle & Ludger Overbeck, 2012. "Copula Dynamics in CDOs," SFB 649 Discussion Papers SFB649DP2012-032, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2012-032
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    References listed on IDEAS

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    1. repec:kap:rqfnac:v:49:y:2017:i:4:d:10.1007_s11156-016-0613-x is not listed on IDEAS
    2. Koziol, Philipp & Schell, Carmen & Eckhardt, Meik, 2015. "Credit risk stress testing and copulas: Is the Gaussian copula better than its reputation?," Discussion Papers 46/2015, Deutsche Bundesbank.
    3. Lu, Meng-Jou & Chen, Cathy Yi-Hsuan & Härdle, Karl Wolfgang & Härdle, 2015. "Copula-Based Factor Model for Credit Risk Analysis," SFB 649 Discussion Papers SFB649DP2015-042, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. Sara Cecchetti & Giovanna Nappo, 2012. "A dynamic default dependence model," Temi di discussione (Economic working papers) 892, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    CDO; multivariate distributions; copula; implied correlations; Value- at-Risk;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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