A Comparative analysis of CDO pricing models

Modelling multivariate tail dependence is one of the key challenges in extreme-value theory. Multivariate extremes are usually characterized using parametric models, some of which have simpler submodels at the boundary of their parameter space. Hypothesis tests are proposed for tail dependence parameters that, under the null hypothesis, are on the boundary of the alternative hypothesis. The asymptotic distribution of the weighted least squares estimator (Einmahl, Kiriliouk and Segers, Extremes 21, pages 205-233, 2018) is given when the true parameter vector is on the boundary of the parameter space, and two test statistics are proposed. The performance of these test statistics is evaluated for the Brown-Resnick model and the max-linear model. In particular, simulations show that it is possible to recover the optimal number of factors for a max-linear model. Finally, the methods are applied to characterize the dependence structure of two major stock market indices, the DAX and the CAC40.

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Pricing of CDOs based on the multivariate Wang transform

Kijima

Motomiya²,

Suzuki³

2010

Journal of Economic Dynamics and Control

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Abstract. This paper shows that the one-factor Gaussian copula model, the standard market model for valuing CDO's, can be derived from the multivariate Wang transform, which is consistent with Bühlmann's equilibrium pricing model, whence it has a sound economic interpretation. The Gaussian copula model is then extended within the Bühlmann's framework. Unlike the existing models, our model calibrates the parameter associated with risk aversion index of the representative investor, not the correlation parameter. A t-copula model is also considered to describe the fat-tail distribution observed in the actual markets.

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A Comparative analysis of CDO pricing models

Cited by 31 publications

References 23 publications

Numerical methods to quantify the model risk of basket default swaps

Numerical methods to quantify the model risk of basket default swaps

Hypothesis testing for tail dependence parameters on the boundary of the parameter space

Pricing of CDOs based on the multivariate Wang transform

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