Dynamic hedging of synthetic CDO tranches with spread risk and default contagion

Rüdiger Frey and Jochen Backhaus

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 4, 710-724

Abstract: The paper is concerned with the hedging of credit derivatives, in particular synthetic CDO tranches, in a dynamic portfolio credit risk model with spread risk and default contagion. The model is constructed and studied via Markov-chain techniques. We discuss the immunization of a CDO tranche against spread- and event risk in the Markov-chain model and compare the results with market-standard hedge ratios obtained in a Gauss copula model. In the main part of the paper we derive model-based dynamic hedging strategies and study their properties in numerical experiments.

Keywords: Dynamic; hedging; Portfolio; credit; risk; Credit; derivatives; Incomplete; markets; Default; contagion (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:4:p:710-724

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