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On the Relative Pricing of Long-Maturity Index Options and Collateralized Debt Obligations





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    • Collin-Dufresne is with Columbia University, EPFL-SFI, and NBER; Goldstein is with the University of Minnesota and NBER; and Yang is with the University of Hong Kong. The paper was previously circulated under the title “On the Relative Pricing of Long-Maturity S & P 500 Index Options and CDX Tranches.” Collin-Dufresne acknowledges the support of the NCCR-FINRISK, a research center of the Swiss National Science Foundation. We thank Luca Benzoni, Josh Coval, Mike Johannes, Jakub Jurek, Erik Stafford, and seminar participants at Carnegie Mellon University, UT Dallas, HEC Lausanne, Federal Reserve Bank Washington, DC, Madison-Wisconsin, Princeton, UCLA, EPFL, University of Vienna, Vanderbilt, ETH Zurich, Warwick, AQR, Bachelier World Symposium, BlackRock Quantitative Finance, Fields Institute, Kepos Capital, Moody's-NYU Credit conference, SwissQuote Conference, S&P Credit Risk Summit, and especially Adrien Vesval for many helpful comments and Credit Suisse for generously providing the options data. All remaining errors are our own.


We investigate a structural model of market and firm-level dynamics in order to jointly price long-dated S&P 500 index options and CDO tranches of corporate debt. We identify market dynamics from index option prices and idiosyncratic dynamics from the term structure of credit spreads. We find that all tranches can be well priced out-of-sample before the crisis. During the crisis, however, our model can capture senior tranche prices only if we allow for the possibility of a catastrophic jump. Thus, senior tranches are nonredundant assets that provide a unique window into the pricing of catastrophic risk.

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