Valuing CDOs of Equity Default Swaps
Date Issued
2005
Date
2005
Author(s)
Yu, Chien-Dai
DOI
en-US
Abstract
The development of credit derivatives is an extension of two of the most significant developments of present times: Securitization and Derivatives. The latest development in structured credit is the Collateralized Debt Obligations (CDOs) of Equity Default Swaps (EDS), or Equity Collateralized Obligations (ECOs). EDS are viewed as attractive alternatives to CDS in the context of synthetic CDOs. In Taiwan, the passing of “The Financial Asset Securitization Law” in June 2002 marks the beginning of securitization market. However, the incomplete rating structure in the domestic market will serve as an obstruction for the development of credit derivatives. Furthermore, investors in Taiwan are less familiar with credit linked products as compared to equity linked products. Therefore, we can expect that EDS will be more attractive in the Taiwan market.
This study gives a reasonable spread of EDS in Taiwan market by Monte Carlo Simulation. We conducted GARCH model to estimate the daily changing volatility instead of constant volatility of underlying stocks when simulating. Moreover, by comparing with different condition in the portfolio, such as the correlation between the underlying assets, trigger level of the contract, recovery rate at equity event, risk free rate, we find out how these factors will influence the EDS spread.
Subjects
股權違約交換
多資產
equity default swaps (EDS)
multi-asset
Monte Carlo Simulation
Type
thesis
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