4. A Simple Dynamic Model for Pricing and Hedging Heterogeneous CDOs

  1. Tomasz R. Bielecki,
  2. Damiano Brigo and
  3. Fédéric Patras
  1. Andrei V. Lopatin

Published Online: 7 SEP 2012

DOI: 10.1002/9781118531839.ch4

Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity

Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity

How to Cite

Bielecki, T. R., Brigo, D. and Patras, F. (2011) A Simple Dynamic Model for Pricing and Hedging Heterogeneous CDOs, in Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity, John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118531839.ch4

Publication History

  1. Published Online: 7 SEP 2012
  2. Published Print: 24 JAN 2011

ISBN Information

Print ISBN: 9781576603581

Online ISBN: 9781118531839

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Keywords:

  • collateralized debt obligations;
  • credit derivatives;
  • Gaussian copula;
  • credit default swaps;
  • default contagion model

Summary

This chapter contains sections titled:

  • Introduction

  • Model

  • Semianalytic Approach

  • Model Calibration

  • Hedging a CDO Tranche

  • Portfolio with Heterogeneous Recovery Coefficients

  • Markovian Projection onto the Default Contagion Model

  • Stochastic Recovery Coefficients

  • Conclusion

  • Appendix 4A: Derivation of the Fokker-Planck Equation (4.3)

  • Appendix 4B: Markovian Projection onto the One-Dimensional Markov Chain

  • Appendix 4C: Self-Consistency Criterion for the Semianalytic Approximation

  • Acknowledgments