CDO Tranche Analytic Pricing with Subordinator Levy Marshall-Olkin Correlation

12 Pages Posted: 11 Jan 2016 Last revised: 12 Jan 2016

Date Written: January 7, 2016

Abstract

In this paper we present two (semi)-analytic synthetic CDO tranche pricing formulas using a subordinator Levy Marshall-Olkin credit correlation model. These formulas can be easily evaluated in terms of machine computational time, therefore they are particularly suitable for the correlation model calibration. To compute the first pricing formula, we assume that the recovery rate and the survival probability is the same for each name of the CDO pool (homogeneous pool approximation). We derive a second pricing formula, under the additional assumption that the number of names in the pool is infinite (large homogeneous pool approximation). Both the two formulas are (semi)-analytic and hold for every class of subordinator Levy process. Finally, the computational cost does not increase with the number of subordinators.

Keywords: Credit Correlation, Marshall-Olkin Copula, Subordinator Levy Process, Credit Default Obligation

JEL Classification: G12, G13

Suggested Citation

Giovannitti, Stefano, CDO Tranche Analytic Pricing with Subordinator Levy Marshall-Olkin Correlation (January 7, 2016). Available at SSRN: https://ssrn.com/abstract=2713441 or http://dx.doi.org/10.2139/ssrn.2713441

Stefano Giovannitti (Contact Author)

UniCredit S.p.A. ( email )

Piazza Gae Aulenti 3
Milan, 20154
Italy

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