Book Details

Internet Resource: Please Login to download book

Svenja Hager aims at pricing non-standard illiquid portfolio credit derivatives which are related to standard CDO tranches with the same underlying portfolio of obligors. Instead of assuming a homogeneous dependence structure between the default times of different obligors, as it is assumed in the standard market model, the author focuses on the use of heterogeneous correlation structures. The intention is to find a correlation matrix sufficiently flexible so that all tranche spreads of a CDO structure can be reproduced simultaneously. This allows for consistent pricing. The calibrated model can then be used to determine the price of non-standard contracts. As there is no standard optimization technique to derive the correlation structure from market prices, Evolutionary Algorithms are applied.