Pricing CDOs with Defaultable Trinomial Trees under Different GARCH Processes
Date Issued
2012
Date
2012
Author(s)
Huang, Shu-Chen
Abstract
Following the work of Lin (2010) and Peter (2004), we use the Defaultable Trinomial Trees under different GARCH Processes to value the spread of CDOs and compare the performances under different GARCH processes. Motivated by the success of Charles and Andrew (1987) parsimonious model, we modify the term structure of the default density function with parsimonious model.
In empirical research, we calibrate the parameters with the stock prices and CDS spread and use Monte Carlo to estimate the spreads of iTraxx Europe Series 15. Comparing the estimators under different GARCH processes, we find that the estimators of 7-year CDOs spread are better than the estimators of 5-year CDOs spread. In addition, Simple GARCH process is better than other GARCH processes when valuing CDOs spread no matter with real correlation matrix or with constant correlation matrix. This result is correspond with Peter and Kris(2004).
Subjects
CODs
D-CRR
GARCH
mean-tracking
Type
thesis
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