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CDO Pricing with Copulae

Barbara Choros-Tomczyk, Wolfgang Härdle and Ostap Okhrin
Authors registered in the RePEc Author Service: Wolfgang Karl Härdle ()

SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: Modeling the portfolio credit risk is one of the crucial issues of the last years in the financial problems. We propose the valuation model of Collateralized Debt Obligations based on a one- and two-parameter copula and default intensities estimated from market data. The presented method is used to reproduce the spreads of the iTraxx Europe tranches. The two-parameter model incorporates the fact that the risky assets of the CDO pool are chosen from six different industry sectors. The dependency among the assets from the same group is described with the higher value of the copula parameter, otherwise the lower value of the parameter is ascribed. Our approach outperforms the standard market pricing procedure based on the Gaussian distribution.

Keywords: CDO; CDS; multifactor models; multivariate distributions; Copulae; correlation smile (search for similar items in EconPapers)
JEL-codes: C14 G12 G13 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2009-03
New Economics Papers: this item is included in nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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