Post-crisis CDO Valuation with Archimedean Copulas

We propose a CDO valuation model with default intensities derived from CDS quotes and dependence structure modeled with Archimedean copulas. The model has been adapted to accommodate the after crisis market conditions. We implemented a two steps process to calibrate the model to replicate iTraxx Europe Series 15 tranche quotes. First we consider an non-homogenous portfolio and model the loss process by letting default intensities vary both across companies and time. Second, we used a constrained optimization technique to determine copula parameters via simulation. Our approach provides a good approximation of market data and allows for performance comparison between copulas.