October 2013
Economic Computation & Economic Cybernetics Studies & Research;2013, Vol. 47 Issue 4, p1
Academic Journal
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.


Related Articles

  • Credit rating impact on CDO evaluation. R�sch, Daniel; Scheule, Harald // Global Finance Journal;Apr2009, Vol. 19 Issue 3, p235 

    Abstract: One of the most significant developments in international credit markets in recent years has been the trade in Collateralized Debt Obligations (CDO), which has enabled financial institutions to repackage the credit risk of an asset portfolio into tranches to be transferred to...

  • Pricing distressed CDOs with stochastic recovery. Höcht, Stephan; Zagst, Rudi // Review of Derivatives Research;2010, Vol. 13 Issue 3, p219 

    In this article, a framework for the joint modelling of default and recovery risk in a portfolio of credit risky assets is presented. The model especially accounts for the correlation of defaults on the one hand and correlation of default rates and recovery rates on the other hand. Nested...

  • UPCOMING EVENTS.  // Asset Securitization Report;9/19/2005, Vol. 5 Issue 35, p2 

    Presents a schedule of events which are related to asset-backed financing. Strategic Research Institute's "Intellectual Property Financing and Securitization" summit; "Credit Risk Management in Structural Finance"; "Auto Road Show"; Issuers and Investors Summit on German Non-Performing Loans;...

  • Street Sheds Risk To ABS CDOs. Pyburn, Allison // Bank Loan Report;3/5/2007, Vol. 22 Issue 9, p1 

    The article reports that dealers in the U.S. financial market have decreased their exposure to collateralized debt obligations (CDO). According to a source, dealers have looked to buy short positions on the ABX indices to avoid long bet. The author states that Merrill Lynch & Co. Inc. was...

  • The Risks in CDO-Squared Structures. Andrew Adams; Rajiv Bhatt; James Clunie // Multinational Finance Journal;Mar-Jun2009, Vol. 13 Issue 1/2, p55 

    The recent sub-prime debacle has brought 'innovative' structured credit products such as collateralized debt obligations under severe criticism. The complexity of some structured finance securities and difficulties in understanding their risks has been a common theme. This paper argues that...

  • Credit Derivatives and Commercial Banks' Risk Management. He Jing // Canadian Social Science;2010, Vol. 6 Issue 4, p194 

    This paper illustrates the value of credit derivatives with two examples. A commercial bank can use credit derivatives to manage the risk of its loan portfolio. However, credit derivatives pose risk management challenges of their own. This paper discusses five of these challenges. Credit...

  • Dynamic Hedging of Portfolio Credit Risk in a Markov Copula Model. Bielecki, Tomasz; Cousin, Areski; Crépey, Stéphane; Herbertsson, Alexander // Journal of Optimization Theory & Applications;Apr2014, Vol. 161 Issue 1, p90 

    We devise a bottom-up dynamic model of portfolio credit risk where instantaneous contagion is represented by the possibility of simultaneous defaults. Due to a Markovian copula nature of the model, calibration of marginals and dependence parameters can be performed separately using a two-step...

  • Bonds benefit from boom in credit. Murray, Neil // Fund Strategy;12/1/2006, p23 

    The article reports on the impact of rapid boom of the collateralized data obligation (CDO) in the structured credit market on the rate of corporate bonds in Great Britain. CDO is a structured transaction which it is established to sell credit protection on a range of fundamental assets. Credit...

  • Moody's on Effects of Monoline Downgrades on Banks. Bizouati, Yael // Asset Securitization Report;2/25/2008, Vol. 7 Issue 8, p9 

    The article reports on the assessment from Moody's Investors Service Inc. in the U.S. The rating agency said that the deterioration in the credit risk profiles of financial guarantors will have significant implications for a number of banks and securities firms. According to Moody's chief credit...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics