Poisson approximation for locally dependent CDO

Nat Yonghint, Kritsana Neammanee and Nattakarn Chaidee

Communications in Statistics - Theory and Methods, 2022, vol. 51, issue 7, 2073-2081

Abstract: A collateralized debt obligation (CDO) is a type of structured asset-backed security. The assets are pooled together and divided into tranches to be sold to investors. Each tranche has a substantially different credit quality and risk level. Jaio and Kaouri (2009), Neammanee and Yonghint (2020) found bounds in Poisson approximation and mean of a percentage loss for each tranche in CDO where all reference assets are independent. In this article, we consider reference assets without assuming independent. Assume that a default of reference asset may not effect to every assets, we say that all assets in CDO are locally dependent CDO. In this work, we use Stein-Chen’s method to find bounds in Poisson approximation in the case of locally dependent CDO. These bounds are better than results of Neammanee and Yonghint (2020).

Date: 2022
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DOI: 10.1080/03610926.2020.1759638

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