EMPIRICAL COPULAS FOR CDO TRANCHE PRICING USING RELATIVE ENTROPY

Michael A. H. Dempster, Elena A. Medova and Seung W. Yang
Additional contact information
Michael A. H. Dempster: Centre for Financial Research, Judge Business School, University of Cambridge, United Kingdom and Cambridge Systems Associates Limited, Cambridge, United Kingdom
Elena A. Medova: Centre for Financial Research, Judge Business School, University of Cambridge, United Kingdom and Cambridge Systems Associates Limited, Cambridge, United Kingdom
Seung W. Yang: Centre for Financial Research, Judge Business School, University of Cambridge, United Kingdom and Cambridge Systems Associates Limited, Cambridge, United Kingdom

Chapter 5 in Credit Correlation:Life After Copulas, 2007, pp 87-109 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe discuss the general optimization problem of choosing a copula with minimum entropy relative to a specified copula and a computationally intensive procedure to solve its dual. These techniques are applied to constructing an empirical copula for CDO tranche pricing. The empirical copula is chosen to be as close as possible to the industry standard Gaussian copula while ensuring a close fit to market tranche quotes. We find that the empirical copula performs noticeably better than the base correlation approach in pricing non-standard tranches and that the market view of default dependence is influenced by maturity.

Keywords: Credit Derivatives; Gaussian Copulas; Tranches; Credit Baskets; Base Correlations (search for similar items in EconPapers)
Date: 2007
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789812709509_0005 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789812709509_0005 (text/html)
Ebook Access is available upon purchase.

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:wsi:wschap:9789812709509_0005

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().