Valuation of collateralized debt obligations: An equilibrium model

May Hu and Jason Park

Economic Modelling, 2019, vol. 82, issue C, 119-135

Abstract: In this paper, we present a new equilibrium model for pricing collateralized debt obligations (CDOs). The model is grounded on option pricing theory and features a random jump size to account for default correlation across reference entities. This feature is important for pricing CDOs during times of market turmoil. Simulation results show that jump size volatility, capturing uncertainty about the size of simultaneous corporate defaults, is a key parameter in pricing CDOs. The effect of jump size volatility on CDO spreads is substantial and depends on the relative position of the mean jump size to loss-coverage limits.

Keywords: Collateralized debt obligations; Default correlation; Global financial crisis (search for similar items in EconPapers)
JEL-codes: G01 G10 G13 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999319312003
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:82:y:2019:i:c:p:119-135

DOI: 10.1016/j.econmod.2019.08.014

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().