A Dynamic Affine Factor Model for the Pricing of Collateralized Debt Obligations

Zehra Eksi and Damir Filipović
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Zehra Eksi: Vienna University of Economics and Business, Institute for Statistics and Mathematics
Damir Filipović: Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

No 13-09, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We propose an affine two-factor model for the pricing of single-tranche collateralized debt obligations by following the general top-down framework introduced in Filipovic et al. [2011]. Apart from being analytically tractable, this model has the feature that it incorporates a catastrophic risk component as a tool to capture the dynamics of super-senior tranches. To appraise the actual performance of the model we run an estimation analysis based on the quasi-maximum likelihood approach in conjunction with the Kalman filter. Our findings suggest that the two-factor model is successful in describing the iTraxx Europe data set which covers the time period including the recent credit crisis.

Keywords: collateralized debt obligations; single-tranche CDO; affine term-structure of credit spreads; catastrophic risk (search for similar items in EconPapers)
JEL-codes: C51 G12 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2013-03
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1309

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