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Correlation Smile Matching for CDO Tranches with α Stable Distributions and Fitted Archimedan Copulas

[Zeitschriftenartikel]

Scherer, Wolfgang; Prange, Dirk

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Abstract As an extension of the standard Gaussian copula model to price CDO tranche swaps we present a generalization of a one-factor copula model based on stable distributions. For special parameter values these distributions coincide with Gaussian or Cauchy distributions, but changing the parameters allows a continuous deformation away from the Gaussian copula. All these factor copulas are embedded into a framework of stochastic correlations. We furthermore generalize the linear dependency in the usual factor approach to a more general Archimedean copula dependency between the individual trigger variable and the common latent factor. Our analysis is carried out on a non-homogeneous correlation structure of the underlying portfolio. CDO tranche market premia, even through the correlation crisis in May 2005, can be reproduced by certain models. From a numerical perspective all these models are simple since calculations can be reduced to one dimensional numerical integrals.
Klassifikation Allgemeines, spezielle Theorien und "Schulen", Methoden, Entwicklung und Geschichte der Wirtschaftswissenschaften; Wirtschaftsstatistik, Ökonometrie, Wirtschaftsinformatik
Methode Theorieanwendung
Freie Schlagwörter Copulas; Correlation modelling; Credit derivatives; Credit models
Sprache Dokument Englisch
Publikationsjahr 2009
Seitenangabe S. 439-449
Zeitschriftentitel Quantitative Finance, 9 (2009) 4
DOI http://dx.doi.org/10.1080/14697680802464428
Status Postprint; begutachtet (peer reviewed)
Lizenz PEER Licence Agreement (applicable only to documents from PEER project)
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