Pricing Tranches of a CDO and a CDS Index: Recent Advances and Future Research

by Dezhong Wang of the University of California, Santa Barbara,
Svetlozar T. Rachev of the University of Karlsruhe & University of California, Santa Barbara, and
Frank J. Fabozzi of Yale University

October 2006

Abstract: In this paper, we review recent advances in pricing tranches of a collateralized debt obligations and credit default swap indexes: one factor Gaussian copula model and its extensions, the structural model, and the loss process model. Then, we propose using heavy-tailed functions in future research. As background, we provide a brief explanation of collateralized debt obligations, credit default swaps, and index tranches.

Keywords: Collateralized Debt Obligation, Credit Default Swap, Credit Default Swap Index, Credit Default Swap Index Tranches.

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