Post by Sapphire Capital on Mar 12, 2009 22:26:42 GMT 4
On the Risk Premium Embedded in CDO Tranches
Manuel Moreno
University of Castilla-La Mancha
Pedro Serrano
Universidad Carlos III de Madrid
February 13, 2009
Abstract:
In spite of many alternatives have been provided for pricing CDOs, almost nothing is known about the economics behind the popular credit portfolio markets. Up to this date. Armed with the recent proposal of Longstaff and Rajan (2008), we explore the ability of simple models for estimating the risk premium embedded on CDO indexes. The model is reformulated enhancing convergence when the valuation is carried out by simulation methods. An exhaustive Monte Carlo study is performed, analyzing the response of the model under different values of the parameters that are exogenous. Finally, the simplest version of the model is estimated by means of an indirect inference method. Our results suggest that this simplified version is not enough to produce market consistent prices.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1342218_code1208770.pdf?abstractid=1342218&mirid=3
Manuel Moreno
University of Castilla-La Mancha
Pedro Serrano
Universidad Carlos III de Madrid
February 13, 2009
Abstract:
In spite of many alternatives have been provided for pricing CDOs, almost nothing is known about the economics behind the popular credit portfolio markets. Up to this date. Armed with the recent proposal of Longstaff and Rajan (2008), we explore the ability of simple models for estimating the risk premium embedded on CDO indexes. The model is reformulated enhancing convergence when the valuation is carried out by simulation methods. An exhaustive Monte Carlo study is performed, analyzing the response of the model under different values of the parameters that are exogenous. Finally, the simplest version of the model is estimated by means of an indirect inference method. Our results suggest that this simplified version is not enough to produce market consistent prices.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1342218_code1208770.pdf?abstractid=1342218&mirid=3