A Dynamic Affine Factor Model for the Pricing of Collateralized Debt Obligations

30 Pages Posted: 30 Mar 2013 Last revised: 10 Apr 2013

See all articles by Zehra Eksi

Zehra Eksi

Vienna University of Economics and Business, Institute for Statistics and Mathematics

Damir Filipović

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Date Written: March 28, 2013

Abstract

We propose an affine two-factor model for the pricing of single-tranche collateralized debt obligations by following the general top-down framework introduced in Filipovic et al. [2011]. Apart from being analytically tractable, this model has the feature that it incorporates a catastrophic risk component as a tool to capture the dynamics of super-senior tranches. To appraise the actual performance of the model we run an estimation analysis based on the quasi-maximum likelihood approach in conjunction with the Kalman filter. Our findings suggest that the two-factor model is successful in describing the iTraxx Europe data set which covers the time period including the recent credit crisis.

Keywords: collateralized debt obligations, single-tranche CDO, affine term-structure of credit spreads, catastrophic risk

JEL Classification: C51, G12

Suggested Citation

Eksi, Zehra and Filipovic, Damir, A Dynamic Affine Factor Model for the Pricing of Collateralized Debt Obligations (March 28, 2013). Swiss Finance Institute Research Paper No. 13-09. Available at SSRN: https://ssrn.com/abstract=2240822 or http://dx.doi.org/10.2139/ssrn.2240822

Zehra Eksi

Vienna University of Economics and Business, Institute for Statistics and Mathematics ( email )

Welthandelsplatz 1
Building D4, 4th floor
Vienna, 1020
Austria

Damir Filipovic (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

HOME PAGE: http://people.epfl.ch/damir.filipovic

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