CDO pricing in VG copula model with stochastic correlations

Author

Yinhui Zhong ; Qunfang Bao ; Shenghong Li

Author_Institution

Dept. of Math., Zhejiang Univ., Hangzhou, China

Volume

2

fYear

2013

fDate

23-24 Nov. 2013

Firstpage

379

Lastpage

383

Abstract

In this paper, we consider the problem of CDO pricing in Factor Copula Model with Variance Gamma variables as loading factors. We extend the VG copula model to the case with stochastic correlations, which can effectively model “correlation skews” in CDO pricing problem. Probability generating functions of finite portfolio and loss distributions of large homogeneous portfolios are explicitly derived in the 2-state stochastic correlation VG copula model. Numerical methods of calculating the quantities involving in CDO pricing are also proposed.

Keywords

investment; pricing; probability; stochastic processes; 2-state stochastic correlation VG copula model; CDO pricing problem; collateralized debt obligations; correlation skews; factor copula model; finite portfolio; large homogeneous portfolios; loading factors; loss distribution; probability generating functions; variance gamma variables; Correlation; Equations; Load modeling; Mathematical model; Portfolios; Pricing; Stochastic processes; CDO; Default Dependence; Pricing; Stochastic Correlations; VG Copula;

fLanguage

English

Publisher

ieee

Conference_Titel

Information Management, Innovation Management and Industrial Engineering (ICIII), 2013 6th International Conference on

Conference_Location

Xi´an

Print_ISBN

978-1-4799-3985-5

Type

conf

DOI

10.1109/ICIII.2013.6703164

Filename

6703164