Dynamics of Dependence in Collateralized Debt Obligations
by Barbara Choroś-Tomczyk of Humboldt-Universität, Berlin,
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.
Keywords: CDO, credit risk management, copulae, times series, value-at-risk.