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

JiangLun Wu; Wei Yang

doi:10.1016/j.mcm.2012.06.038

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

JiangLun Wu, Wei Yang

Mathematics And Statistics

Research output: Contribution to journal › Article

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 language	English
Pages (from-to)	570-583
Number of pages	14
Journal	Mathematical and Computer Modelling
Volume	57
Issue number	3-4
DOIs	https://doi.org/10.1016/j.mcm.2012.06.038
Publication status	Published - Feb 2013

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Keywords

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

Cite this

Wu, J., & Yang, W. (2013). Valuation of synthetic CDOs with affine jump-diffusion processes involving Lévy stable distributions. Mathematical and Computer Modelling, 57(3-4), 570-583. https://doi.org/10.1016/j.mcm.2012.06.038

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abstract = "Noticing the heavy tail dependence phenomenon in the Collateralised Debt Obligation (CDO) markets, we utilize affine jump-diffusion processes involving L{\'e}vy 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.",

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AB - 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.

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KW - intensity based model

KW - affine jump-diffusion processes

KW - heavy tail dependence

KW - Lévy stable distributions

U2 - 10.1016/j.mcm.2012.06.038

DO - 10.1016/j.mcm.2012.06.038

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Access to Document

10.1016/j.mcm.2012.06.038