DefaultRisk.com the web's biggest credit risk modeling resource. |  |
|
|
| A Simple Dynamic Model for Pricing and Hedging Heterogenous CDOs by Andrei V. Lopatin of NumeriX, LLC October 18, 2009 Abstract: We present a simple bottom-up dynamic credit model that can be calibrated simultaneously to the market quotes on CDO tranches and individual CDSs constituting the credit portfolio. The model is most suitable for the purpose of evaluating the hedge ratios of CDO tranches with respect to the underlying credit names. Default intensities of individual assets are modeled as deterministic functions of time and the total number of defaults accumulated in the portfolio. To overcome numerical diffculties, we suggest a semi-analytic approximation that is justified by the large number of portfolio members. We calibrate the model to the recent market quotes on CDO tranches and individual CDSs and find the hedge ratios of tranches. Results are compared with those obtained within the static Gaussian Copula model. JEL Classification: C63, C65, G12. Keywords: default contagion, loss distribution, Markovian projection, synthetic CDO, tranche delta. Books Referenced in this Paper: (what is this?)
Download paper (496K PDF) 31 pages
[Home] [CDO Papers]  |
|
Please contact me with problems or suggestions. |
