Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098956 | Journal of Economic Dynamics and Control | 2010 | 15 Pages |
Abstract
The paper is concerned with the hedging of credit derivatives, in particular synthetic CDO tranches, in a dynamic portfolio credit risk model with spread risk and default contagion. The model is constructed and studied via Markov-chain techniques. We discuss the immunization of a CDO tranche against spread- and event risk in the Markov-chain model and compare the results with market-standard hedge ratios obtained in a Gauss copula model. In the main part of the paper we derive model-based dynamic hedging strategies and study their properties in numerical experiments.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
RĂ¼diger Frey, Jochen Backhaus,