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 language | English |
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Pages (from-to) | 570-583 |
Number of pages | 14 |
Journal | Mathematical and Computer Modelling |
Volume | 57 |
Issue number | 3-4 |
DOIs | |
Publication status | Published - Feb 2013 |
Keywords
- collateralised debt obligations (CDOs)
- intensity based model
- affine jump-diffusion processes
- heavy tail dependence
- Lévy stable distributions