The correlation evaluation of collateralized debt obligation (CDO) Tranches

• Main Authors: Yen-Kai Liu, 劉彥楷
• Other Authors: Yung-Tsung Lee
• Format: Others
• Language: zh-TW
• Published: 2010
• Online Access: http://ndltd.ncl.edu.tw/handle/36440769421802474891

碩士 === 國立嘉義大學 === 企業管理學系 === 99 === The probability of default (PD), the loss given default (LGD), the exposure at default (EAD) and the default correlation are some important issues for the pricing of Collateralized Debt Obligations (CDOs). A growing body of literature indicates that the positive correlation between PD and LGD cannot be ignored in the pricing process. Therefore, in addition to using Copula function as the linkage between the sub-structure of tranches, we assume that there is a positive correlation between PD and LGD when pricing CDOs. By a simulation approach, we find that the effect of the length of maturity to PD cannot be revealed and the capture of extremely rare events is poor when using the Gaussian Copula simulation, so the Clayton Copula simulation is employed in the numerical results. Some important findings are as follows: First, the PD of subordinate tranche increases significantly as the correlation between PD and LGD increases; it also increases significantly as the LGD increases. Second, when the default correlation is greater than a moderate level, the rise of the PD of senior tranche is extremely significant when the correlation between PD and LGD increases; this is also the case when considering the increase of the LGD. Thurs, the correlation between PD and LGD cannot be ignored when pricing each tranche of a CDO.