CDO TERM STRUCTURE MODELLING WITH LÉVY PROCESSES AND THE RELATION TO MARKET MODELS

Thorsten Schmidt and Jerzy Zabczyk
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Thorsten Schmidt: Department of Mathematics, Chemnitz University of Technology, Reichenhainer Str. 41, 09126 Chemnitz, Germany
Jerzy Zabczyk: Institute of Mathematics of the Polish Academy of Sciences, Sniadeckich 8, POB 21, 00-956, Warszawa 10, Poland

Chapter 24 in Finance at Fields, 2012, pp 555-573 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper considers the modelling of collateralized debt obligations (CDOs). We propose a top-down model via forward rates generalizing Filipović, Overbeck and Schmidt (2009) to the case where the forward rates are driven by a finite dimensional Lévy process. The contribution of this work is twofold: we provide conditions for absence of arbitrage in this generalized framework. Furthermore, we study the relation to market models by embedding them in the forward rate framework in spirit of Brace, Gatarek and Musiela (1997).

Keywords: Mathematical Finance; Financial Mathematics; Risk Management; Asset Pricing; Computational Finance; Derivatives; Option Pricing; Portfolio Optimization (search for similar items in EconPapers)
Date: 2012
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