We propose a model that uses copula functions to represent both cross-section and temporal dependence in basket od credit derivative and CDO tranches. The paper uses: i) a sequence of copula functions to represent the joint distribution of losses in each period; ii) a sequence of bivariate copula functions to represent the dependence structure between losses in each period and cumulated losses at the beginning of it. Based on this information, we propose an algorithm to propagate losses, and jointly recover the value of different tranches for the same maturity and those of the same tranche for different maturities. An illustrative application is proposed on the specific case of a CDX basket.

A Copula-Based Model of the Term Structure of CDO Tranches

CHERUBINI, UMBERTO;MULINACCI, SABRINA;ROMAGNOLI, SILVIA
2008

Abstract

We propose a model that uses copula functions to represent both cross-section and temporal dependence in basket od credit derivative and CDO tranches. The paper uses: i) a sequence of copula functions to represent the joint distribution of losses in each period; ii) a sequence of bivariate copula functions to represent the dependence structure between losses in each period and cumulated losses at the beginning of it. Based on this information, we propose an algorithm to propagate losses, and jointly recover the value of different tranches for the same maturity and those of the same tranche for different maturities. An illustrative application is proposed on the specific case of a CDX basket.
Applied Quantitative Finance
69
81
U.Cherubini; S.Mulinacci; S.Romagnoli
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11585/62443
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