Copula Dynamics in CDOs

SFB 649 Discussion Paper 2012-032

25 Pages Posted: 7 Jan 2017

See all articles by Barbara Choroś-Tomczyka

Barbara Choroś-Tomczyka

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Wolfgang K. Härdle

Humboldt University of Berlin - Institute for Statistics and Econometrics; Xiamen University - Wang Yanan Institute for Studies in Economics (WISE); Charles University; Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Ludger Overbeck

University of Giessen

Date Written: January 9, 2012

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 names in the portfolio mainly depends on current economic conditions. Therefore, a correlation implied from tranches can be seen as a measure of the general health of the credit market. We analyse the European market of standardized CDOs using tranches of 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.

Keywords: CDO, multivariate distributions, copula, implied correlations, Value-at- Risk

JEL Classification: C13, C22, C53, G32

Suggested Citation

Choroś-Tomczyka, Barbara and Härdle, Wolfgang K. and Overbeck, Ludger, Copula Dynamics in CDOs (January 9, 2012). SFB 649 Discussion Paper 2012-032, Available at SSRN: https://ssrn.com/abstract=2894217 or http://dx.doi.org/10.2139/ssrn.2894217

Barbara Choroś-Tomczyka

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE) ( email )

Spandauer Strasse 1
Berlin, D-10178
Germany

Wolfgang K. Härdle (Contact Author)

Humboldt University of Berlin - Institute for Statistics and Econometrics ( email )

Unter den Linden 6
Berlin, D-10099
Germany

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

Charles University ( email )

Celetná 13
Dept Math Physics
Praha 1, 116 36
Czech Republic

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Unter den Linden 6
Berlin, D-10099
Germany

Ludger Overbeck

University of Giessen ( email )

Institut of Mathematics
Giessen, 35394
Germany

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