The Subprime Credit Crisis of 2007

Crouhy, Michel; Jarrow, Robert A.; Turnbull, Stuart M.

doi:10.3905/jod.2008.710899

Cited by 129 publications

(52 citation statements)

References 8 publications

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“…Misconceptions about CDO of subprimes, such as the understatement of dependence across minitranches are now well-known and discussed (see Crouhy et al (2008)) 41 . If one dares looking at facts eyes wide open, it seems clear that trading desks managing synthetic CDOs had dissimilar performances, which is not surprising, regarding the number of technical issues briefly addressed within this paper.…”

Section: Resultsmentioning

confidence: 99%

“…Both models are widely used amongst practitioners and have sound and easy to understand theoretical foundations. We will not pay of lot of attention to so-called intensity models, one should either say models based on Cox processes, due to their difficulties in dealing with the high degree of dependence between default events, as seen during the credit and liquidity crisis 29 . Similarly, we will only briefly deal with incomplete market approaches even though some seem to be associated with appealing hedging efficiency.…”

Section: Ii2 Back To Back-testingmentioning

confidence: 99%

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Dynamic Hedging of Synthetic CDO Tranches: Bridging the Gap between Theory and Practice

Cousin¹,

Laurent

2011

Credit Risk Frontiers

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Section: Resultsmentioning

confidence: 99%

Section: Ii2 Back To Back-testingmentioning

confidence: 99%

Dynamic Hedging of Synthetic CDO Tranches: Bridging the Gap between Theory and Practice

Cousin¹,

Laurent

2011

Credit Risk Frontiers

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“…However, default correlation is hard to measure and this part contributed mostly to the failure of CDO valuation (Brunnermeier (2009), BIS (2008, Crouhy, Jarrow, andTurnbull (2008), Hull (2008), Plosser (2009Plosser ( ), S&P (2007). For such low oc-currence events, Bayesian approach is particularly appealing (Kiefer (2009), McNeil andWendin (2007), Glasserman andLi (2005), Loffler (2003)).…”

Section: Default Correlation and Frailty Factormentioning

confidence: 99%

A Little Knowledge Is a Dangerous Thing: Model Specification, Data History, and CDO (Mis)Pricing

Luo

Wang

Tang³

2009

SSRN Journal

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The revaluation of collateralized debt obligations (CDOs) plays a significant role in the ongoing 2007-2009 credit crisis. Starting in August 2007, a large amount of initially AAA rated CDO securities are substantially downgraded, some directly to junk grade. This paper explores two structural sources of CDO mispricing: modeling difficulty and data limitation. Simulating the frailty correlated default model of Duffie, Eckner, Horel, and Saita (2008), we show that CDO mis-pricing can be partly attributed to model misspecifications, as well as limited availability of historical data on CDO collateral assets. This simulation result is consistent with empirical evidence on historical performance of a sample of 279 CDOs. The frailty model estimated with adequate historical data would have reduced the amount of AAA rated CDO securities by 12% on average. The frailty model has predictive power for the subsequent downgrading of AAA rated CDO tranches. Our study addresses practical issues on financial innovations and provides guidance for corresponding risk management. * , a large amount of initially AAA rated CDO securities are substantially downgraded, some directly to junk grade. This paper explores two structural sources of CDO mispricing: modeling difficulty and data limitation. Simulating the frailty correlated default model of Duffie, Eckner, Horel, and Saita (2008), we show that CDO mis-pricing can be partly attributed to model misspecifications, as well as limited availability of historical data on CDO collateral assets. This simulation result is consistent with empirical evidence on historical performance of a sample of 279 CDOs. The frailty model estimated with adequate historical data would have reduced the amount of AAA rated CDO securities by 12% on average. The frailty model has predictive power for the subsequent downgrading of AAA rated CDO tranches. Our study addresses practical issues on financial innovations and provides guidance for corresponding risk management.

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“…For an overview of CDO-related write-downs at major financial institutions, see [1]. An analysis of the crisis in a wider scope can be found in [2] or [3]). Modeling the correlation structure of a credit portfolio is mainly based on the Gaussian copula, which has received much criticism even in a non-academic context, see [4].…”

Section: Introductionmentioning

confidence: 99%

Application of Vine Copulas to Credit Portfolio Risk Modeling

Geidosch¹,

Fischer

2016

JRFM

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Abstract:In this paper, we demonstrate the superiority of vine copulas over conventional copulas when modeling the dependence structure of a credit portfolio. We show statistical and economic implications of replacing conventional copulas by vine copulas for a subportfolio of the Euro Stoxx 50 and the S&P 500 companies, respectively. Our study includes D-vines and R-vines where the bivariate building blocks are chosen from the Gaussian, the t and the Clayton family. Our findings are (i) the conventional Gauss copula is deficient in modeling the dependence structure of a credit portfolio and economic capital is seriously underestimated; (ii) D-vine structures offer a better statistical fit to the data than classical copulas, but underestimate economic capital compared to R-vines; (iii) when mixing different copula families in an R-vine structure, the best statistical fit to the data can be achieved which corresponds to the most reliable estimate for economic capital.

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The Subprime Credit Crisis of 2007

Cited by 129 publications

References 8 publications

Dynamic Hedging of Synthetic CDO Tranches: Bridging the Gap between Theory and Practice

Dynamic Hedging of Synthetic CDO Tranches: Bridging the Gap between Theory and Practice

A Little Knowledge Is a Dangerous Thing: Model Specification, Data History, and CDO (Mis)Pricing

Application of Vine Copulas to Credit Portfolio Risk Modeling

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