Valuation of synthetic CDOs with affine jump-diffusion processes involving Lévy stable distributions

JiangLun Wu, Wei Yang

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

Noticing the heavy tail dependence phenomenon in the Collateralised Debt Obligation (CDO) markets, we utilize affine jump-diffusion processes involving Lévy stable distributions to model the systematic and idiosyncratic risk factors under the setting of intensity-based models. We further derive explicit formulae for the expected loss of CDO tranches under this modelling framework.
Original languageEnglish
Pages (from-to)570-583
Number of pages14
JournalMathematical and Computer Modelling
Volume57
Issue number3-4
DOIs
Publication statusPublished - Feb 2013

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Keywords

  • collateralised debt obligations (CDOs)
  • intensity based model
  • affine jump-diffusion processes
  • heavy tail dependence
  • Lévy stable distributions

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