Pricing collateralized debt obligations with pure jump Levy processes: A dynamic bottom-up approach
Item
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Title
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Pricing collateralized debt obligations with pure jump Levy processes: A dynamic bottom-up approach
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Identifier
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d_2009_2013:409384740218:10975
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identifier
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11345
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Creator
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Basaga, Uluhan,
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Contributor
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Liuren Wu
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Date
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2011
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Language
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English
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Publisher
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City University of New York.
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Subject
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Finance
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Abstract
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The Gaussian copula model is the industry standard in pricing CDO tranches because of its easy implementation and speedy calibration. However, it has several well-known shortcomings: It leads to the so-called "correlation smile", generates symmetric and light-tailed asset return distributions and it is static. This dissertation proposes a dynamic bottom-up model based on a pure jump Levy process, a path rarely taken in the credit pricing literature, and makes a comprehensive empirical analysis of bottom-up CDO pricing models. Owing to its ability to capture asymmetric heavy-tailed return distributions and to accommodate different degrees of dampening for positive and negative jumps, empirical evidence shows that the proposed model significantly outperforms the models commonly employed in the industry and frequently referenced in the literature in fitting CDX and iTraxx tranche spreads. As such, it constitutes an important addition to the credit pricing literature.
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Type
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dissertation
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Source
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2009_2013.csv
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degree
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Ph.D.
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Program
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Economics
