Pricing Portfolio Credit Derivatives Using a Simplified Dynamic Model
Date Issued
2008
Date
2008
Author(s)
Lin, Kuan-Chi
Abstract
This thesis investigates dynamic methods for pricing portfolio credit derivatives, especially the standardized market for CDO: iTraxx Europe index. Compared with previous static models, i.e., the copula functions, the dynamic models are applicable to much more exotic portfolio credit derivatives. This thesis uses the concept of the dynamic model from Hull and White (2007). But we modify it by adjusting some parameters. We also find a better way for calibration to give the model more economic sense. The iTraxx Europe index can also be valued analytically using our model. Besides the analytic method, we consider the binomial tree and Monte Carlo method to make pricing more flexible. Finally, the revised dynamic model captures the advantages of the original one and also provides a good fit to CDO quotes.
Subjects
portfolio credit derivatives
iTraxx Europe index
dynamic model
Type
thesis
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