Journal of Risk
ISSN:
1465-1211 (print)
1755-2842 (online)
Editor-in-chief: Farid AitSahlia
Basket default swaps, CDOs and factor copulas
Jean-Paul Laurent, Jon Gregory
Abstract
ABSTRACT
We consider a factor approach to the pricing of basket credit derivatives and synthetic collateralized debt obligation (CDO) tranches. Our purpose is to deal in a convenient way with dependent defaults for a large number of names. We provide semi-explicit pricing formulae for basket default swaps and CDO tranches. Two cases are studied in detail: mean-variance mixture models and frailty models. We also compare prices under Gaussian and Clayton copulas.
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