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Bootstrapping a Single-Tranche CDO

Posted: 30 Apr 2014  

Vilimir Yordanov

Independent

Date Written: December 31, 2013

Abstract

The paper proposes a new methodology for bootstrapping a single-tranche CDO and estimating the term structure of expected loss. If for a CDS swap there is a clear established standard in the face of the ISDA CDS Standard Model that relies on a survival curve based on default intensity, for a CDO swap there is no equivalent counterpart available. It is not a priori clear what the survival curve in that case should look like. We propose both intensity like and copula based solutions sticking to efficiency and parsimony.

Keywords: swap, bootstrap, intensity, compensator, recovery, copula, dependence

JEL Classification: G13

Suggested Citation

Yordanov, Vilimir, Bootstrapping a Single-Tranche CDO (December 31, 2013). Available at SSRN: https://ssrn.com/abstract=2430859

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