NOTES ON EXACT AND SEMI-EXACT LÉVY MODELS FOR THE VALUATION OF CDOs

A. Eichler (), G. Leobacher () and H. Zellinger ()
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A. Eichler: Institute of Financial Mathematics, Johannes Kepler University, Linz, Austria
G. Leobacher: Institute of Financial Mathematics, Johannes Kepler University, Linz, Austria
H. Zellinger: Institute of Financial Mathematics, Johannes Kepler University, Linz, Austria

International Journal of Theoretical and Applied Finance (IJTAF), 2010, vol. 13, issue 06, 979-1000

Abstract: We investigate the effects of certain simplifying assumptions that are often made when valuating tranches of collateralized debt obligations (CDOs) using a firm's value approach. Those assumptions are the homogeneity and largeness of the portfolio and the so-called European approximation. The error made in this way is measured by comparing the result to a model with less simplification which is evaluated by the use of Monte Carlo simulation.

Keywords: CDOs; correlated debt; Lévy one-factor model; Monte Carlo simulation; control variates (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1142/S0219024910006078

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