Albanese, Claudio and Vidler, Alicia (2007): A STRUCTURAL MODEL FOR CREDIT-EQUITY DERIVATIVES AND BESPOKE CDOs. Published in: Wilmott Magazine , Vol. 2007, No. May (1. May 2007)
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We present a new structural model for single name equity and credit derivatives which we also correlate across reference names to produce a model for bespoke synthetic CDOs. The model captures volatility and outlook risk along with correlation risk for small and for large moves separately. We show that the model calibrates well to both equity structured products and credit derivatives. As examples, we discuss a number of single name derivatives on IBM spanning the credit-equity spectrum and ranging from volatility swaps, to cliquets, CDS options and CDSs on leveraged loans with pre-payment risk. We also use the model to price tranches on the investment grade DJ.CDX.IG index along with tranches on the high yield index DJ.CDX.HY. We show that the model gives consistent and high precision pricing across all these derivative asset classes. We show that this can be achieved consistently, with the very same parameter choices across these diverse derivative assets and making use of only minor explicit time dependencies.
|Item Type:||MPRA Paper|
|Original Title:||A STRUCTURAL MODEL FOR CREDIT-EQUITY DERIVATIVES AND BESPOKE CDOs|
|Keywords:||Credit derivatives; equity derivatives; long dated derivatives; CDOs; structural model|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing|
|Depositing User:||Claudio Albanese|
|Date Deposited:||09. Oct 2007|
|Last Modified:||13. Feb 2013 23:27|
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