Introducing an analytical solution and an improved one-factor gaussian copula model for the pricing of heterogeneous CDOs. Gao, X., Wu, B., & Schäfer, T. International Journal of Financial Engineering, 04(02n03):1750038, June, 2017. Citation Key Alias: lens.org/183-625-470-365-466, pop00170![Introducing an analytical solution and an improved one-factor gaussian copula model for the pricing of heterogeneous CDOs [link]](https://bibbase.org/img/filetypes/link.svg "link")
Paper doi abstract bibtex This paper introduced an analytical solution and improved one-factor Gaussian copula models to the pricing of tranches of a Collateralized debt obligations (CDO) portfolio. Prices of CDO tranches are calculated and compared using the analytical model and different one-factor Gaussian copula models including a two-category heterogeneous model and a completely heterogeneous model that uses individual rate parameter and correlation coefficient for each reference entity in a CDO portfolio. When correlation among reference entities is low, the price calculated from the analytical model matches very well with the one-factor Gaussian copula models. However, as the correlation among reference entities increases, prices calculated using both the analytical solution and the homogeneous or two-category one-factor Gaussian copula models significantly deviate from the completely heterogeneous one-factor Gaussian copula model. This result verifies our belief that uniform parameters cannot completely capture all the heterogeneities in a CDO portfolio. Completely heterogeneous one-factor Gaussian copula model using individual rate parameters and correlation coefficients for each reference entities provides more reliable and accurate prices for structured securities.
@article{gao_introducing_2017,
title = {Introducing an analytical solution and an improved one-factor gaussian copula model for the pricing of heterogeneous {CDOs}},
volume = {04},
issn = {2424-7863, 2424-7944},
url = {https://www.worldscientific.com/doi/abs/10.1142/S2424786317500384},
doi = {10.1142/S2424786317500384},
abstract = {This paper introduced an analytical solution and improved one-factor Gaussian copula models to the pricing of tranches of a Collateralized debt obligations (CDO) portfolio. Prices of CDO tranches are calculated and compared using the analytical model and different one-factor Gaussian copula models including a two-category heterogeneous model and a completely heterogeneous model that uses individual rate parameter and correlation coefficient for each reference entity in a CDO portfolio. When correlation among reference entities is low, the price calculated from the analytical model matches very well with the one-factor Gaussian copula models. However, as the correlation among reference entities increases, prices calculated using both the analytical solution and the homogeneous or two-category one-factor Gaussian copula models significantly deviate from the completely heterogeneous one-factor Gaussian copula model. This result verifies our belief that uniform parameters cannot completely capture all the heterogeneities in a CDO portfolio. Completely heterogeneous one-factor Gaussian copula model using individual rate parameters and correlation coefficients for each reference entities provides more reliable and accurate prices for structured securities.},
language = {en},
number = {02n03},
urldate = {2019-10-08},
journal = {International Journal of Financial Engineering},
author = {Gao, Xin and Wu, Binlin and Schäfer, Tobias},
month = jun,
year = {2017},
note = {Citation Key Alias: lens.org/183-625-470-365-466, pop00170},
keywords = {dept.phy},
pages = {1750038},
}
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