Dynamic Hedging of Synthetic CDO Tranches with Spread Risk and Default Contagion

Rüdiger Frey, Jochen Backhaus

Publikation: Wissenschaftliche FachzeitschriftOriginalbeitrag in FachzeitschriftBegutachtung


The paper is concerned with the hedging of credit derivatives, in particular synthetic
CDO tranches, in a dynamic portfolio credit risk model with spread risk and default contagion.
The model is constructed and studied via Markov-chain techniques. We discuss the
immunization of a CDO tranche against spread- and event risk in the Markov-chain model
and compare the results with market-standard hedge ratios obtained in a Gauss copula
model. In the main part of the paper we derive model-based dynamic hedging strategies
and study their properties in numerical experiments.
Seiten (von - bis)710 - 724
FachzeitschriftJournal of Economic Dynamics & Control
PublikationsstatusVeröffentlicht - 1 Dez. 2010