Journal article

Publication year: 2014

Pages: 1573-1585

Journal: Quantitative Finance

Volume number: 14

Issue number: 9

ISSN: 1469-7688

eISSN: 1469-7696

DOI Link: https://doi.org/10.1080/14697688.2013.847280

Publisher: Taylor and Francis Group

Abstract: 
Values of tranche spreads of collateralized debt obligations (CDOs) are driven by the joint default performance of the assets in the collateral pool. The dependence between the entities in the portfolio mainly depends on current economic conditions. Therefore, a correlation implied from tranches can be seen as a measure of the general situation of the credit market. We analyse the European market of standardized CDOs using tranches of the iTraxx index in the periods before and during the global financial crisis. We investigate the evolution of the correlations using different copula models: the standard Gaussian, the NIG, the double-t, and the Gumbel copula model. After calibration of these models, one obtains a time varying vector of parameters. We analyse the dynamic pattern of these coefficients. That enables us to forecast future parameters and consequently calculate Value-at-Risk measures for iTraxx Europe tranches.

Harvard Citation style: Choros-Tomczyk, B., Haerdle, W. and Overbeck, L. (2014) Copula dynamics in CDOs, Quantitative Finance, 14(9), pp. 1573-1585. https://doi.org/10.1080/14697688.2013.847280

APA Citation style: Choros-Tomczyk, B., Haerdle, W., & Overbeck, L. (2014). Copula dynamics in CDOs. Quantitative Finance. 14(9), 1573-1585. https://doi.org/10.1080/14697688.2013.847280