RELATING TOP-DOWN WITH BOTTOM-UP APPROACHES IN THE EVALUATION OF ABS WITH LARGE COLLATERAL POOLS

Nicolas Diener, Robert Jarrow () and Philip Protter ()
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Nicolas Diener: Barclays Capital, 745 Seventh Avenue, New York, NY 10019, USA
Philip Protter: Statistics Department, Columbia University, New York, NY 10027, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2012, vol. 15, issue 02, 1-20

Abstract: This paper uses a conditional law of large numbers and a conditional central limit theorem to provide simplified asymptotic valuation formulas for credit derivatives on baskets, including synthetic and cash-flow CDOs. In particular, approximate pricing procedures are provided for synthetic and cash-flow CDOs. In the process, this paper also clarifies the relation between the "top-down" and "bottom-up" approaches for pricing credit derivatives.

Keywords: Credit derivatives; CDOs; ABS; top-down; Conditional Central Limit Theorem (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1142/S0219024912500112

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