the web's biggest credit risk modeling resource.

Credit Jobs

Home Glossary Links FAQ / About Site Guide Search


Submit Your Paper

In Rememberance: World Trade Center (WTC)

doi> search: A or B

Export citation to:
- Text (plain)
- BibTeX

Pricing Tranched Credit Products with Generalized Multifactor Models

by Manuel Moreno of the University of Castilla La-Mancha,
Juan Ignacio Peņa of Universidad Carlos III, Madrid, and
Pedro Serrano of the University of Basque Country

October 22, 2007

Abstract: The market for tranched credit products (CDOs, iTraxx tranches) is one of the fastest growing segments in the credit derivatives industry. However, some assumptions underlying the standard Gaussian one factor pricing model (homogeneity, single factor, Normality), which is the pricing standard widely used in the industry, are probably too restrictive. In this paper we generalize the standard model by means of a two by two model (two factors and two asset classes). We assume two driving factors (business cycle and industry) with independent t-Student distributions, respectively, and we allow the model to distinguish among portfolio assets classes. In order to illustrate the estimation of the parameters of the model, an empirical application with Moody's data is also included and potential relationships between default rates and macroeconomic variables are analyzed.

JEL Classification: G13, C35, C51.

Keywords: Collateral Debt Obligations, Factor Models, Probit-Logit Models.

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

Download paper (288K PDF) 44 pages