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CDO pricing with factor models: survey and comments

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  • Leif Andersen
  • Jakob Sidenius

Abstract

ABSTRACT Models with systematic factors are popular in the modeling of CDOs, mainly owing to their simplicity and tractability. In this small note we provide a general framework which we use to survey a number of CDO models that have appeared in the literature so far. We suggest extensions and also briefly discuss a select number of issues with factor models, ranging from calibration against CDO market data (ie, base correlation skews) to credit spread hedging and maturity extrapolation. We highlight a number of inherent limitations of factor models and also discuss certain idiosyncracies of popular model-independent approaches to computation of spread hedges.

Suggested Citation

  • Leif Andersen & Jakob Sidenius, . "CDO pricing with factor models: survey and comments," Journal of Credit Risk, Journal of Credit Risk.
    • Handle: RePEc:rsk:journ1:2160686
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