Doubly Stochastic CDO Term Structures

This paper provides a general framework for doubly stochastic term structure models for portfolio of credits, such as collateralized debt obligations (CDOs). We introduce the defaultable (T, x)-bonds, which pay one if the aggregated loss process in the underlying pool of the CDO has not exceeded x at maturity T, and zero else. Necessary and sufficient conditions on the stochastic term structure movements for the absence of arbitrage are given. Moreover, we show that any exogenous specification of the forward rates and spreads volatility curve actually yields a consistent loss process and thus an arbitrage-free family of (T, x)-bond prices. For the sake of analytical and computational efficiency we then develop a tractable class of affine term structure models.


Published in:
Seminar On Stochastic Analysis, Random Fields And Applications Vi, 63, 413-428
Presented at:
6th Seminar on Stochastic Analysis, Random Fields and Applications, Ascona, SWITZERLAND, May 19-23, 2008
Year:
2011
Publisher:
Birkhauser Boston, C/O Springer-Verlag, Service Center, 44 Hartz Way, Secaucus, Nj 07096-2491 Usa
ISBN:
978-3-0348-0020-4
Keywords:
Laboratories:




 Record created 2011-12-16, last modified 2018-03-17


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