Using Distortions of Copulas to Price Synthetic CDOs

DefaultRisk.com the web's biggest credit risk modeling resource.

Submit Your Paper

Fitch Ratings Jobs

[ Worldwide]

Post Your Résumé
For Recruiters

Featured Book

Paris-Princeton Lectures on Mathematical Finance 2004 Finance 2004
by Rene A. Carmona, Ivar Ekeland, Arturo Kohatsu-Higa, Jean-Michel Lasry, Pierre-Louis Lions, Huyen Pham, Erik Taflin, Springer, (October 1, 2007), Paperback, 248 pages

Training Discounted for DefaultRisk.com visitors only:

The Mathematics of Credit Derivatives: The Essential Credit Modelling and Pricing Companion
by Philipp J. Schönbucher,
WBS Training, August 2003, DVD / Interactive CD-ROM

Sponsor:
Shop at Amazon.com and support DefaultRisk.com

Using Distortions of Copulas to Price Synthetic CDOs

by Glenis Crane of the University of Adelaide, and
John van der Hoek of the University of Adelaide

May 2007

Abstract: This paper uses distortions of the bivariate Gaussian copula to produce a heavy tail for expected portfolio loss distribution in the context of synthetic Collateralized Debt Obligations (CDOs). We demonstrate that when the distorted copulas are used within the JP Morgan CDO pricing formula, as an example, we can simulate quite realistic tranche prices. Furthermore, we need only one dependence parameter for the entire portfolio instead of one per tranche. This method may allow practitioners to price CDOs more accurately than with other versions of the Gaussian copula and with fewer correlation parameters.

Keywords: copula functions, CDOs, transformations.

Books Referenced in this Paper: (what is this?)