Pricing and hedging of CDO-squared tranches by using a one factor Lévy model

F.M.Y. Guillaume, P. Jacobs, W. Schoutens

    Research output: Contribution to journalArticleAcademicpeer-review

    4 Citations (Scopus)


    This paper provides a comparison of the exponential copula Lévy model with the classical Gaussian copula model for the pricing of CDO-squared tranches. Several approximations of the recursive approach are considered: a full Monte Carlo approximation, a multivariate Normal approximation of the joint inner CDO loss distribution and a multivariate Poisson approximation of the joint number of defaults affecting the inner CDOs. More particularly, a sensitivity analysis is carried out for three particular days characterized by a low, medium and high value of the quoted iTraxx and CDX index spreads. Moreover, this paper features a comparison of the exponential Lévy and Gaussian Deltas under the multivariate Normal approximation for a period extended from 20 September 2007 until 13 February 2008. The Deltas are computed with respect to a weighted and unweighted version of the CDS pool as well as with respect to another CDO-squared tranche.
    Original languageEnglish
    Pages (from-to)663-685
    JournalInternational Journal of Theoretical and Applied Finance
    Issue number5
    Publication statusPublished - 2009


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