Valuation of synthetic CDOs with affine jump-diffusion processes involving Levy stable distributions
Noticing the heavy tail dependence phenomenon in the Collateralised Debt Obligation (CDO) markets, we utilize affine jump-diffusion processes involving Levy stable distributions to model the systematic and idiosyncratic risk factors under the setting of intensity-based models. We further derive explicit formulae for the expected loss of CDO tranches under this modelling framework. (C) 2012 Elsevier Ltd. All rights reserved.
affine jump-diffusion processes levy stable distributions heavy tail dependence collateralised debt obligations (cdos) intensity based model