Cdo Pricing with Factor Models: Survey and Comments

Posted: 13 Nov 2005

Abstract

Models with systematic factors are popular in the modeling of CDOs, mainly owing to their simplicity and tractability. In this small note we provide a general framework which we use to survey a number of CDO models that have appeared in the literature so far. We suggest extensions and also briefly discuss a select number of issues with factor models, ranging from calibration against CDO market data (ie, base correlation skews) to credit spread hedging and maturity extrapolation. We highlight a number of inherent limitations of factor models and also discuss certain idiosyncracies of popular model-independent approaches to computation of spread hedges.

Keywords: CDOs, CDO models, calibration against CDO market data, nase correlation skews, model-independent approaches

Suggested Citation

Andersen, Leif B.G. and Sidenius, Jakob, Cdo Pricing with Factor Models: Survey and Comments. Journal of Credit Risk, Vol. 1, No. 3, Summer 2005. Available at SSRN: https://ssrn.com/abstract=844213

Leif B.G. Andersen (Contact Author)

Bank of America Merrill Lynch ( email )

One Bryant Park
New York, NY 10036
United States
646-855-1835 (Phone)

Jakob Sidenius

Independent ( email )

No Address Available

Register to save articles to
your library

Register

Paper statistics

Abstract Views
4,725
PlumX Metrics