Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/79627
Authors: 
Choros-Tomczyk, Barbara
Härdle, Wolfgang Karl
Okhrin, Ostap
Year of Publication: 
2013
Series/Report no.: 
SFB 649 Discussion Paper 2013-032
Abstract: 
Modelling the dynamics of credit derivatives is a challenging task in finance and economics. The recent crisis has shown that the standard market models fail to measure and forecast financial risks and their characteristics. This work studies risk of collateralized debt obligations (CDOs) by investigating the evolution of tranche spread surfaces and base correlation surfaces using a dynamic semiparametric factor model (DSFM). The DSFM offers a combination of flexible functional data analysis and dimension reduction methods, where the change in time is linear but the shape is nonparametric. The study provides an empirical analysis based on iTraxx Europe tranches and proposes an application to curve trading strategies. The DSFM allows us to describe the dynamics of all the tranches for all available maturities and series simultaneously which yields better understanding of the risk associated with trading CDOs and other structured products.
Subjects: 
base correlation
collateralized debt obligation
curve trade
dynamic factor model
semiparametric model
JEL: 
C14
C51
G11
G17
Document Type: 
Working Paper

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