CDOs in Chains

DefaultRisk.com the web's biggest credit risk modeling resource.

Submit Your Paper

Post Your Résumé

For Recruiters

Today's Featured Book

Global Catastrophic Risks
by Martin J. Rees, Nick Bostrom, Milan Cirkovic, Oxford University Press, September 15, 2008, Hardcover, 550 pages

Training Discounted for DefaultRisk.com visitors only:

The Mathematics of Credit Derivatives: The Essential Credit Modelling and Pricing Companion
by Philipp J. Schönbucher,
WBS Training, August 2003, DVD / Interactive CD-ROM

Sponsor:
Shop at Amazon.com and support DefaultRisk.com

CDOs in Chains

by Johan de Kock of Fraunhofer ITWM,
Holger Kraft of the University of Kaiserslautern, and
Mogens Steffensen of the University of Copenhagen

January 24, 2007

Abstract: This paper discusses the pricing of CDOs in a Markov chains framework. We show that in general the values of the legs satisfy systems of partial differential equations. In the special case of constant default intensities, one only needs to solve a system of ordinary differential equations, the so-called Kolmogorov differential equations.

JEL Classification: G13, G33.

Keywords: Markov chains, credit risk, credit derivatives, contagion.

Books Referenced in this Paper: (what is this?)