Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: We value synthetic CDO tranche spreads, index CDS spreads, kth-to-default swap spreads and tranchelets in an intensity-based credit risk model with default contagion. The default dependence is modelled by letting individual intensities jump when other defaults occur. The model is reinterpreted as a Markov jump process. This allow us to use a matrix-analytic approach to derive computationally tractable closed-form expressions for the credit derivatives that we want to study. Special attention is given to homogenous portfolios. For a fixed maturity of five years, such a portfolio is calibrated against CDO tranche spreads, index CDS spread and the average CDS and FtD spreads, all taken from the iTraxx Europe series. After the calibration, which render perfect fits, we compute spreads for tranchelets and kth-to-default swap spreads for different subportfolios of the main portfolio. We also investigate implied tranche-losses and the implied loss distribution in the calibrated portfolios.

Keywords: Credit risk; intensity-based models; CDO tranches; index CDS; kth-to-default swaps; dependence modelling; default contagion; Markov jump processes; Matrix-analytic methods

JEL-codes: C02; C63; G13; G32; G33

28 pages, October 31, 2007

Full text files

7464 HTML file 

Download statistics

• University of Gothenburg, Department of Economics
• Ordering Working Papers
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Ann-Christin Räätäri Nyström ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2024-02-05 17:11:22.