Valuation of collateralized debt obligations in a multivariate subordinator model

Authors:
Yunpeng Sun;Rafael Mendoza-Arriaga;Vadim Linetsky
Affiliations:
Northwestern University, Evanston, IL;University of Texas at Austin, Austin, TX;Northwestern University, Evanston, IL
Venue:
Proceedings of the Winter Simulation Conference
Year:
2011

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Abstract

The paper develops valuation of multi-name credit derivatives, such as collateralized debt obligations (CDOs), based on a novel multivariate subordinator model of dependent default (failure) times. The model can account for high degree of dependence among defaults of multiple firms in a credit portfolio and, in particular, exhibits positive probabilities of simultaneous defaults of multiple firms. The paper proposes an efficient simulation algorithm for fast and accurate valuation of CDOs with large number of firms.