Skip to main content
padlock icon - secure page this page is secure

CDO pricing with nested Archimedean copulas

Buy Article:

$53.00 + tax (Refund Policy)

Companies in the same industry sector are usually more correlated than firms in different sectors, as they are similarly affected by macroeconomic effects, political decisions, and consumer trends. Despite the many stock return models taking this fact into account, there are only a few credit default models that take it into consideration. In this paper we present a default model based on nested Archimedean copulas that is able to capture hierarchical dependence structures among the obligors in a credit portfolio. Nested Archimedean copulas have a surprisingly simple and intuitive interpretation. The dependence among all companies in the same sector is described by an inner copula and the sectors are then coupled via an outer copula. Consequently, our model implies a larger default correlation for companies in the same industry sector than for companies in different sectors. A calibration to CDO tranche spreads of the European iTraxx portfolio is performed to demonstrate the fitting capability of the model. This portfolio consists of CDS on 125 companies from six different industry sectors and is therefore an excellent portfolio for a comparison of our generalized model with a traditional copula model of the same family that does not take different sectors into account.
No Reference information available - sign in for access.
No Citation information available - sign in for access.
No Supplementary Data.
No Article Media
No Metrics

Keywords: CDO; Hierarchial dependence structure; Monte-Carlo pricing; Nested Archimedean copula

Document Type: Research Article

Affiliations: 1: Institute of Number Theory and Probability Theory, Ulm University, Helmholtzstraße 18 89081 Ulm, Germany 2: HVB Stiftungsinstitut für Finanzmathematik, Technische Universität München, Boltzmannstraße 3 85748 Garching, Germany

Publication date: May 1, 2011

  • Access Key
  • Free content
  • Partial Free content
  • New content
  • Open access content
  • Partial Open access content
  • Subscribed content
  • Partial Subscribed content
  • Free trial content
Cookie Policy
Cookie Policy
Ingenta Connect website makes use of cookies so as to keep track of data that you have filled in. I am Happy with this Find out more