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Analytical Pricing of CDOs in a Multi-factor Setting by a Moment Matching Approach

by Antonio Castagna of iason Ltd.,
Fabio Mercurio of Bloomberg LP & iason Ltd., and
Paola Mosconi of Banca IMI

January 16, 2012

Abstract: We try and apply the single-scenario version of the general model in Castagna, Mercurio and Mosconi (2010) to the pricing of CDOs. We are able to establish a unified approach to both evaluate the Credit VaR and the risk of structured products, and thus evaluate on a consistent and uniform basis the Economic Capital required to face unexpected credit losses, and the risk transferred out of the balance sheet via the securitisation activity. The approach avoids to resort to cumbersome numerical procedure, by retaining a closed-form feature that allows a quick and accurate pricing of CDO structures.

JEL Classification: C63, G11, G38.

Keywords: CDO pricing, moment matching, credit risk transfer, multifactor credit model.

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