Theoretical Solution versus Industry Standard: Optimal leverage function for CPDOs
by Evren Baydar of the University of Kaiserslautern,
Abstract: In this paper, we derive an optimal leverage function for Constant Proportion Debt Obligations (CPDOs) by using stochastic control techniques. The investor's goal is to maximise redemption of capital at maturity. The control variable of the problem is the leverage process, i.e. the time dependent notional exposure to the underlying risky index/portfolio.
Keywords: CPDO, Constant Proportion Debt Obligation, Optimal Control, Credit Derivatives.
Published in: Blätter der DGVFM, Vol. 30, No. 1, (April 2009), pp. 15-29.
Previously titled: Optimal Leverage Function for CPDOs --and before that-- Optimal leverage in CPDOs