IDEAS home Printed from https://ideas.repec.org/p/zbw/tuedps/300.html
   My bibliography  Save this paper

Deriving the dependence structure of portfolio credit derivatives using evolutionary algorithms

Author

Listed:
  • Hager, Svenja
  • Schöbel, Rainer

Abstract

Even if the correct modeling of default dependence is essential for the valuation of portfolio credit derivatives, for the pricing of synthetic CDOs a one-factor Gaussian copula model with constant and equalpairwise correlationsfor all assets in the reference portfolio has become the standard market model. If this model were a re?ection of market opinion, there wouldn't be the implied correlation smilethatis observedinthe market. Thepurposeof thispaperistoderive a correlation structure from observed CDO tranche spreads. The correlation structure is chosen such that all tranche spreads of the traded CDO can be reproduced. This implied correlation structure can then be used to price o?-market tranches with the same underlying as the traded CDO. Using this approach we can significantly reduce the risk to misprice o?-market derivatives. Due to the complexity of the optimization problem we apply Evolutionary Algorithms.

Suggested Citation

  • Hager, Svenja & Schöbel, Rainer, 2006. "Deriving the dependence structure of portfolio credit derivatives using evolutionary algorithms," Tübinger Diskussionsbeiträge 300, University of Tübingen, School of Business and Economics.
  • Handle: RePEc:zbw:tuedps:300
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/40319/1/558781845.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Schnabl, Gunther, 2003. "China: a stabilizing or deflationary influence in East Asia?The problem of conflicted virtue," Tübinger Diskussionsbeiträge 263, University of Tübingen, School of Business and Economics.
    2. Kukuk, Martin & Stadler, Manfred, 2002. "Rivalry and innovation races," Tübinger Diskussionsbeiträge 236, University of Tübingen, School of Business and Economics.
    3. Ronald McKinnon & Gunther Schnabl, 2004. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Review of Development Economics, Wiley Blackwell, vol. 8(3), pages 331-360, August.
    4. Gunther Schnabl, 2004. "De jure versus de facto Exchange Rate Stabilization in Central and Eastern Europe," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 59(02), pages 171-190, June.
    5. Brassat, Marcel & Kiesewetter, Dirk, 2002. "Steuervorteile durch Versorgungszusagen in Arbeitsverträgen," Tübinger Diskussionsbeiträge 248, University of Tübingen, School of Business and Economics.
    6. Grupp, Hariolf & Stadler, Manfred, 2004. "Technological Progress and Market Growth : An Empirical Study Based on the Quality-Ladder Approach," Tübinger Diskussionsbeiträge 281, University of Tübingen, School of Business and Economics.
    7. Starbatty, Joachim, 2002. "Die Abschaffung der DM ist noch keine Bereitschaft zur politischen Union," Tübinger Diskussionsbeiträge 246, University of Tübingen, School of Business and Economics.
    8. Niemann, Rainer & Kiesewetter, Dirk, 2002. "Zur steuerlichen Vorteilhaftigkeit von Kapitallebensversicherungen," Tübinger Diskussionsbeiträge 239, University of Tübingen, School of Business and Economics.
    9. Neubecker, Leslie, 2002. "The strategic effect of debt in dynamic price competition with fluctuating demand," Tübinger Diskussionsbeiträge 250, University of Tübingen, School of Business and Economics.
    10. Gampfer, Ralf, 2002. "Fallende Preise in sequentiellen Auktionen: Das Beispiel des Gebrauchtwagenhandels," Tübinger Diskussionsbeiträge 231, University of Tübingen, School of Business and Economics.
    11. Licht, Georg & Stadler, Manfred, 2003. "Auswirkungen öffentlicher Forschungsförderung auf die private F&E-Tätigkeit: Eine mikroökonomische Evaluation," Tübinger Diskussionsbeiträge 256, University of Tübingen, School of Business and Economics.
    12. Kleinert, Jörn & Toubal, Farid, 2005. "A Structural Model of Export versus Affiliates Production," Tübinger Diskussionsbeiträge 288, University of Tübingen, School of Business and Economics.
    13. Gunther Schnabl & Paul De Grauwe, 2004. "Nominal versus Real Convergence with Respect to EMU Accession - EMU Entry Scenarios for the New Member States," International Finance 0403008, EconWPA, revised 16 Feb 2005.
    14. J.Baten & J.Wallusch, 2005. "Market Integration and Disintegration of Poland and Germany in the 18th Century," Economies et Sociétés (Serie 'Histoire Economique Quantitative'), Association Française de Cliométrie (AFC), issue 33, pages 1233-1264, July.
    15. Lachmund, Andreas & Kiesewetter, Dirk, 2004. "Wirkungen einer Abgeltungssteuer auf Investitionsentscheidungen und Kapitalstruktur von Unternehmen," Tübinger Diskussionsbeiträge 278, University of Tübingen, School of Business and Economics.
    16. repec:ebl:ecbull:v:4:y:2005:i:12:p:1-7 is not listed on IDEAS
    17. Güth, Werner & Stadler, Manfred, 2004. "Path Dependence Without Denying Deliberation : An Exercise Model Connecting Rationality and Evolution," Tübinger Diskussionsbeiträge 282, University of Tübingen, School of Business and Economics.
    18. Baur, Dirk & Schulze, Niels, 2005. "Coexceedances in financial markets--a quantile regression analysis of contagion," Emerging Markets Review, Elsevier, vol. 6(1), pages 21-43, April.
    19. Jung, Robert & Kukuk, Martin & Liesenfeld, Roman, 2005. "Time Series of Count Data: Modelling and Estimation," Economics Working Papers 2005-08, Christian-Albrechts-University of Kiel, Department of Economics.
    20. Kiesewetter, Dirk, 2002. "Tax neutrality and business taxation in Russia: A proposal for a consumption-based reform of the Russian income and profit tax," Tübinger Diskussionsbeiträge 242, University of Tübingen, School of Business and Economics.
    21. Neubecker, Leslie & Stadler, Manfred, 2003. "In hunt for size: Merger formation in the oil industry," Tübinger Diskussionsbeiträge 258, University of Tübingen, School of Business and Economics.
    22. Zaby, Alexandra K., 2005. "Losing the lead: Patents and the disclosure requirement," Tübinger Diskussionsbeiträge 296, University of Tübingen, School of Business and Economics.
    23. Stadler, Manfred, 2002. "Leistungsorientierte Besoldung von Hochschullehrern auf der Grundlage objektiv messbarer Kriterien," Tübinger Diskussionsbeiträge 237, University of Tübingen, School of Business and Economics.
    24. Baur, Dirk, 2002. "The persistence and asymmetry of time-varying correlations," Tübinger Diskussionsbeiträge 232, University of Tübingen, School of Business and Economics.
    25. Ronald McKinnon & Gunther Schnabl, 2003. "Synchronised Business Cycles in East Asia and Fluctuations in the Yen/Dollar Exchange Rate," The World Economy, Wiley Blackwell, vol. 26(8), pages 1067-1088, August.
    26. Knirsch, Deborah, 2002. "Neutrality-based effective tax rates," Tübinger Diskussionsbeiträge 249, University of Tübingen, School of Business and Economics.
    27. Neus, Werner, 2002. "Fusionsanreize, strategische Managerentlohnung und die Frage des geeigneten Unternehmensziels," Tübinger Diskussionsbeiträge 244, University of Tübingen, School of Business and Economics.
    28. Schnabl, Gunther, 2005. "Der Festkurs als merkantilistische Handelspolitik : Chinas Währungs- und Geldpolitik im Umfeld globaler Ungleichgewichte," Tübinger Diskussionsbeiträge 291, University of Tübingen, School of Business and Economics.
    29. Stadler, Manfred, 2004. "Bildung, Innovationsdynamik und Produktivitätswachstum," Tübinger Diskussionsbeiträge 280, University of Tübingen, School of Business and Economics.
    30. Bayer, Stefan, 2003. "Possibilities and limitations of economically valuating ecological damages," Tübinger Diskussionsbeiträge 254, University of Tübingen, School of Business and Economics.
    31. Godart, Olivier N. & Toubal, Farid, 2005. "Cross The Border and Close The Gap? : How Do Migrants Enhance Trade," Tübinger Diskussionsbeiträge 289, University of Tübingen, School of Business and Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    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:zbw:tuedps:300. 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: (ZBW - German National Library of Economics). General contact details of provider: http://edirc.repec.org/data/wftuede.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.