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Title:CDO pricing with copulae PDF Logo
Authors:Choroś, Barbara
Härdle, Wolfgang Karl
Okhrin, Ostap
Issue Date:2009
Series/Report no.:SFB 649 discussion paper 2009,013
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.
Subjects:CDO
CDS
multifactor models
multivariate distributions
copulae
correlation smile
JEL:C14
G12
G13
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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