Factor Distributions Implied by Quoted CDO Spreads Tranche Pricing
The rapid pace of innovation in the market for credit risk has given rise to a liquid market in synthetic collateralised debt obligation (CDO) tranches on standardised portfolios. To the extent that tranche spreads depend on default dependence between different obligors in the reference portfolio, quoted spreads can be seen as aggregating the market views on this dependence. In a manner reminiscent of the volatility smiles found in liquid option markets, practitioners speak of implied correlation “smiles” and “skews”. We explore how this analogy can be taken a step further to extract implied factor distributions from the market quotes for synthetic CDO tranches.
|Date of creation:||01 Jan 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.qfrc.uts.edu.au/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October.
- Emmanuel Jurczenko & Bertrand Maillet & Bogdan Negrea, 2002. "Revisited multi-moment approximate option pricing models: a general comparison (Part 1)," LSE Research Online Documents on Economics 24950, London School of Economics and Political Science, LSE Library.
- Jondeau, Eric & Rockinger, Michael, 2001. "Gram-Charlier densities," Journal of Economic Dynamics and Control, Elsevier, vol. 25(10), pages 1457-1483, October.
- Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
- Schlögl, Erik, 2013. "Option pricing where the underlying assets follow a Gram/Charlier density of arbitrary order," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 611-632.
When requesting a correction, please mention this item's handle: RePEc:uts:rpaper:190. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Duncan Ford)
If references are entirely missing, you can add them using this form.