Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098865 | Journal of Economic Dynamics and Control | 2010 | 14 Pages |
Abstract
This paper extends the one-factor Gaussian copula model, the standard market model for valuing CDOs, based on the multivariate Wang transform. Unlike the existing models, our model calibrates the parameter associated with a risk adjustment for default threshold, not correlation parameter, which always exists and is unique for any market price of CDO tranche. A Student t-copula model is also considered within the same framework to describe a fat-tail distribution observed in the actual market. Through numerical experiments, it is shown that our model provides a better fit to the market data compared with the existing models.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Masaaki Kijima, Shin-ichi Motomiya, Yoichi Suzuki,