CDO pricing with copulae

Arbeitspapier

Modeling the portfolio credit risk is one of the crucial issues of the last years in the financial problems. We propose the valuation model of Collateralized Debt Obligations based on a one- and two-parameter copula and default intensities estimated from market data. The presented method is used to reproduce the spreads of the iTraxx Europe tranches. The two-parameter model incorporates the fact that the risky assets of the CDO pool are chosen from six different industry sectors. The dependency among the assets from the same group is described with the higher value of the copula parameter, otherwise the lower value of the parameter is ascribed. Our approach outperforms the standard market pricing procedure based on the Gaussian distribution.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 649 Discussion Paper ; No. 2009,013

Classification and Topics

• Classification: Wirtschaft ; Semiparametric and Nonparametric Methods: General ; Asset Pricing; Trading Volume; Bond Interest Rates ; Contingent Pricing; Futures Pricing; option pricing
• Subject: CDO ; CDS ; multifactor models ; multivariate distributions ; copulae ; correlation smile ; Kreditsicherung ; Securitization ; Wertpapieranalyse ; Kopula (Mathematik) ; Faktorenanalyse ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Choroś, Barbara ; Härdle, Wolfgang Karl ; Okhrin, Ostap
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
• (where): Berlin
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/25329
• Last update: 10.03.2025, 11:42 AM CET