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Dynamics of Dependence in Collateralized Debt Obligations

by Barbara Choroś-Tomczyk of Humboldt-Universität, Berlin,
Wolfgang Karl Härdle of Humboldt-Universität, Berlin, and
Ludger Overbeck of Giessen University

August 12, 2011

Abstract: Values of spreads of collateralized debt obligations (CDOs) are mainly driven by dependence between names in the underlying portfolio. A correlation implied from CDO data can be seen as a measure of the general health of the credit market. This paper provides an empirical analysis of the dependence parameters implied from iTraxx Europe tranches using three different pricing models: the standard Gaussian, the NIG, and the double-t model. The forecasts of the model's parameters are used for calculating Value-at-Risk measures for tranches.

JEL Classification: C13, G12, G13, G21.

Keywords: CDO, credit risk management, copulae, times series, value-at-risk.

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