Title
Pricing and hedging of CDO-squared tranches by using a one factor Lévy model Pricing and hedging of CDO-squared tranches by using a one factor Lévy model
Author
Faculty/Department
Faculty of Sciences. Mathematics and Computer Science
Publication type
article
Publication
Singapore ,
Subject
Economics
Mathematics
Source (journal)
International journal of theoretical and applied finance. - Singapore
Volume/pages
12(2009) :5 , p. 663-685
ISSN
0219-0249
Carrier
E
Target language
English (eng)
Abstract
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.
E-info
https://repository.uantwerpen.be/docman/iruaauth/11fb7b/4fb9bb08aba.pdf