Pricing of CDOs based on the multivariate Wang transform

Masaaki Kijima, Shin-ichi Motomiya and Yoichi Suzuki

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 11, 2245-2258

Abstract: This paper extends the one-factor Gaussian copula model, the standard market model for valuing CDOs, based on the multivariate Wang transform. Unlike the existing models, our model calibrates the parameter associated with a risk adjustment for default threshold, not correlation parameter, which always exists and is unique for any market price of CDO tranche. A Student t-copula model is also considered within the same framework to describe a fat-tail distribution observed in the actual market. Through numerical experiments, it is shown that our model provides a better fit to the market data compared with the existing models.

Keywords: One-factor; Gaussian; copula; model; Merton's; structural; model; Multivariate; Wang; transform; Student; t; copula (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:11:p:2245-2258

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