This paper considers a top-down approach for CDO valuation and proposes a market model. We extend previous research on this topic in two directions: on the one side, we use as driving process for the interest rate dynamics a time-inhomogeneous L\'evy process, and on the other side, we do not assume that all maturities are available in the market. Only a discrete tenor structure is considered, which is in the spirit of the classical Libor market model. We create a general frameworkfor market models based on multidimensional semimartingales. This framework is able to capture dependence between the default-free and the defaultable dynamics, as well as contagion effects. Conditions for absence of arbitrage and valuation formulas for tranches of CDOs are given .
The goal of this paper is to specify dynamic term structure models with discrete tenor structure for credit portfolios in a top-down setting driven by time-inhomogeneous L\'evy processes. We provide a new framework, conditions for absence of arbitrage , explicit examples, an affine setup which includes contagion and pricing formulas for STCDOs and options on STCDOs. A calibration to iTraxx data with an extended Kalman filter shows an excellent fit over the full observation period. The calibration is done on a set of CDO tranche spreads ranging across six tranches and three maturities .
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This paper considers a
The goal of this paper is to specify dynamic term structure models with discrete tenor structure for credit portfolios in a
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approach for CDO valuation and proposes a market model. We extend previous research on this topic in two directions: on the one side, we use as driving process for the interest rate dynamics a
setting driven by
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process, and on the other side, we do not assume that all maturities are available in the market. Only a discrete tenor structure is considered, which is in the spirit of the classical Libor market model. We create a general frameworkfor market models based on multidimensional semimartingales. This framework is able to capture dependence between the default-free and the defaultable dynamics, as well as contagion effects. Conditions
processes. We provide a new framework, conditions
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and valuation formulas for tranches of CDOs are given
, explicit examples, an affine setup which includes contagion and pricing formulas for STCDOs and options on STCDOs. A calibration to iTraxx data with an extended Kalman filter shows an excellent fit over the full observation period. The calibration is done on a set of CDO tranche spreads ranging across six tranches and three maturities