Abstract
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.
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.
| Originalsprache | Englisch |
|---|---|
| Seiten (von - bis) | 710 - 724 |
| Fachzeitschrift | Journal of Economic Dynamics & Control |
| Jahrgang | 34 |
| Publikationsstatus | Veröffentlicht - 1 Dez. 2010 |