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On the Relative Pricing of long Maturity S&P 500 Index Options and CDX Tranches

  • Pierre Collin-Dufresne
  • Robert S. Goldstein
  • Fan Yang
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    We investigate a structural model of market and firm-level dynamics in order to jointly price long-dated S&P 500 options and tranche spreads on the five-year CDX index. We demonstrate the importance of calibrating the model to match the entire term structure of CDX index spreads because it contains pertinent information regarding the timing of expected defaults and the specification of idiosyncratic dynamics. Our model matches the time series of tranche spreads well, both before and during the financial crisis, thus offering a resolution to the puzzle reported by Coval, Jurek and Stafford (2009).

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    File URL: http://www.nber.org/papers/w15734.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15734.

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    Date of creation: Feb 2010
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    Publication status: published as On the Relative Pricing of long Maturity Options an d Collateralized Debt Obligations," Pierre Collin- Dufresne, Robert S. Goldstein and Fan Yang, The Journal of Finance, Vol.67 No.6, 2012.
    Handle: RePEc:nbr:nberwo:15734
    Note: AP
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    National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.

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