TITLE

CREDIT RISK DEPENDENCE MODELING FOR COLLATERALIZED DEBT OBLIGATIONS

AUTHOR(S)
GAIDUCHEVICI, Gabriel; NEGREA, Bogdan
PUB. DATE
October 2013
SOURCE
Economic Computation & Economic Cybernetics Studies & Research;2013, Vol. 47 Issue 4, p1
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
The cost of protection on a CDO tranche is driven, to a large extent, by the default dependence among entities composing the underlying portfolio. We propose a CDO valuation model where we independently fit default intensities to CDS market data and then calibrate different types of copulas to match the portfolio default dependence. We have adapted our model to accommodate the after crisis market conditions that changed the way CDO tranches are quoted and traded. The model is calibrated to replicate the up-front fees for the iTraxx Europe tranches. Our approach provides a good approximation of market data and allows for performance comparison of different classes of copulas.
ACCESSION #
93394293

 

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