A comparison among various correlation measurements in a copula-based CDO pricing model
Date Issued
2009
Date
2009
Author(s)
Hsiao, Kuang-Chen
Abstract
We compare several types of correlation measurements used as inputs of the traditional Gaussian copula pricing model for CDO tranches. Using the linear correlation coefficient of stock returns to measure the correlation between each entity within the CDO is the traditional approach. Here, instead of using stock returns, we try to measure the correlation via using CDS spreads. We compare the pricing results among different initial inputs, such as differentime horizons of data and different correlation formula. Our result indicates that instead of using the linear correlation coefficient, in certain periods, using other dependence measurements such as Kendall’s tau and Spearman’s rho can perform better pricing results. Also, the pricing results carry high explanatory power for various correlation measurements. Furthermore, we find thatccording to our pricing results, the correlation structure among the entities may have changed significantly during the 2007 subprime crisis.
Subjects
CDO
Copula function
correlation
Type
thesis
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