Work

A Generic One-Factor Lévy Model for Pricing Synthetic CDOs

Year: 2007

Type: book-chapter

Abstract: The one-factor Gaussian model is well known not to fit the prices of the different tranches of a collateralized debt obligation (CDO) simultaneously, leading to the implied correlation smile. Recently, other one-factor models based on different distributions have been proposed. Moosbrucker [12] used a one-factor Variance-Gamma (VG) model, Kalemanova et al. [7] and Guégan and Houdain [6] worked with a normal inverse Gaussian (NIG) factor model, and Baxter [3] introduced the Brownian Variance-Gamma (BVG) model. These models bring more flexibility into the dependence structure and allow tail dependence. We unify these approaches, describe a generic one-factor Lévy model, and work out the large homogeneous portfolio (LHP) approximation. Then we discuss several examples and calibrate a battery of models to market data.

Source: Applied and numerical harmonic analysis

DOI: 10.1007/978-0-8176-4545-8_14

Authors: Hansjörg Albrecher, Sophie A. Ladoucette, Wim Schoutens

Institutions: Austrian Academy of Sciences, Graz University of Technology, Johann Radon Institute for Computational and Applied Mathematics, KU Leuven

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W138112401

FWCI: 20.12

Cites: 19

Cited by: 70

Related to: 10