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A semiparametric factor model for CDO surfaces dynamics

Author

Listed:
  • Choroś-Tomczyk, Barbara
  • Härdle, Wolfgang Karl
  • Okhrin, Ostap

Abstract

Modelling the dynamics of credit derivatives is a challenging task in finance and economics. This work studies risk of collateralized debt obligations (CDOs) by investigating the evolution of tranche spread surfaces and base correlation surfaces using a dynamic semiparametric factor model (DSFM). The DSFM offers a combination of flexible functional data analysis and dimension reduction methods, where the change in time is linear but the shape is nonparametric. The study provides an empirical analysis based on a big data set of iTraxx Europe tranches and proposes an application to curve trading strategies. The DSFM allows us to describe the dynamics of all the tranches for all available maturities and series simultaneously which yields better understanding of the risk associated with trading CDOs and other structured products.

Suggested Citation

  • Choroś-Tomczyk, Barbara & Härdle, Wolfgang Karl & Okhrin, Ostap, 2016. "A semiparametric factor model for CDO surfaces dynamics," Journal of Multivariate Analysis, Elsevier, vol. 146(C), pages 151-163.
    • Handle: RePEc:eee:jmvana:v:146:y:2016:i:c:p:151-163
    DOI: 10.1016/j.jmva.2015.09.002
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    References listed on IDEAS

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    Cited by:

    1. Petra Burdejová & Wolfgang K. Härdle, 2019. "Dynamic semi-parametric factor model for functional expectiles," Computational Statistics, Springer, vol. 34(2), pages 489-502, June.
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    More about this item

    Keywords

    CDO; Curve trade; Dynamic factor model; Semiparametric model; Surfaces dynamics;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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