SIMULTANEOUS CALIBRATION TO A RANGE OF PORTFOLIO CREDIT DERIVATIVES WITH A DYNAMIC DISCRETE-TIME MULTI-STEP MARKOV LOSS MODEL

Michael B. Walker ()
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Michael B. Walker: Department of Physics, University of Toronto, Toronto, ON M5S 1A7, Canada

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 05, 633-662

Abstract: This article describes a dynamic discrete-time multi-step Markov model for the losses experienced by a given credit portfolio, and develops a method for the simultaneous calibration of the model to all available relevant market prices (for CDO's, forward-start CDO's, options on CDO's, leveraged super-senior tranches with loss triggers, etc.) established on a given day. The implementation is via an efficient linear programming procedure, and examples are given. The approach represents an extension of previous work (Walker, 2005, 2006; Torresetti et al., 2006) on the static loss-surface model to a model containing the necessary underlying dynamics.

Keywords: Calibration; multi-step Markov model; forward-start CDO's; options on CDO's; leveraged super-senior Tranches (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1142/S0219024909005439

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