Title
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Pricing and hedging of CDO-squared tranches by using a one factor Lévy model
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Author
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Abstract
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This paper provides a comparison of the exponential copula Lévy model with the classical Gaussian copula model for the pricing of CDO-squared tranches. Several approximations of the recursive approach are considered: a full Monte Carlo approximation, a multivariate Normal approximation of the joint inner CDO loss distribution and a multivariate Poisson approximation of the joint number of defaults affecting the inner CDOs. More particularly, a sensitivity analysis is carried out for three particular days characterized by a low, medium and high value of the quoted iTraxx and CDX index spreads. Moreover, this paper features a comparison of the exponential Lévy and Gaussian Deltas under the multivariate Normal approximation for a period extended from 20 September 2007 until 13 February 2008. The Deltas are computed with respect to a weighted and unweighted version of the CDS pool as well as with respect to another CDO-squared tranche. |
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Language
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English
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Source (journal)
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International journal of theoretical and applied finance. - Singapore
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Publication
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Singapore
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2009
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ISSN
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0219-0249
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Volume/pages
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12
:5
(2009)
, p. 663-685
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Full text (publisher's version - intranet only)
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