A Generic One-Factor Lévy Model for Pricing Synthetic CDOs

Albrecher, Hansjörg; Ladoucette, Sophie A.; Schoutens, Wim

doi:10.1007/978-0-8176-4545-8_14

Cited by 56 publications

(80 citation statements)

References 15 publications

(16 reference statements)

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“…If this single weight is denoted by w, then 1/w is referred to as the Dow Jones Divisor. 1 The pay-off of a basket option with strike K and maturity T is given by (S(T ) − K) + , where (x) + = max(x, 0). The price of this basket option is denoted by C[K, T ].…”

Section: The One-factor Lévy Modelmentioning

confidence: 99%

“…This larger class of distributions increases the flexibility to find a more realistic distribution for the log returns. In Albrecher et al [1] a similar framework was considered for pricing CDO tranches; see also Baxter [5]. The Variance Gamma case was considered in Moosbrucker [40,41], whereas Guillaume et al [22] consider the pricing of CDO-squared tranches in this one-factor Lévy model.…”

Section: The Modelmentioning

confidence: 99%

“…In this paper we start from the one-factor Lévy model introduced in Albrecher et al [1] to build a multivariate stock price model with correlated Lévy marginals. Stock prices are assumed to be driven by an idiosyncratic and a systematic factor.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Basket Option Pricing and Implied Correlation in a One-Factor Lévy Model

Linders

Schoutens

2016

Innovations in Derivatives Markets

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In this paper we employ a one-factor Lévy model to determine basket option prices. More precisely, basket option prices are determined by replacing the distribution of the real basket with an appropriate approximation. For the approximate basket we determine the underlying characteristic function and hence we can derive the related basket option prices by using the Carr-Madan formula. We consider a three-moments-matching method. Numerical examples illustrate the accuracy of our approximations; several Lévy models are calibrated to market data and basket option prices are determined. In the last part we show how our newly designed basket option pricing formula can be used to define implied Lévy correlation by matching model and market prices for basket options. Our main finding is that the implied Lévy correlation smile is flatter than its Gaussian counterpart. Furthermore, if (near) atthe-money option prices are used, the corresponding implied Gaussian correlation estimate is a good proxy for the implied Lévy correlation.

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Section: The One-factor Lévy Modelmentioning

confidence: 99%

Section: The Modelmentioning

confidence: 99%

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Basket Option Pricing and Implied Correlation in a One-Factor Lévy Model

Linders

Schoutens

2016

Innovations in Derivatives Markets

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“…The (financial) interpretation in terms of asset value is that there is a deterministic up trend, given by √ with random downward shocks G u (see Albrecher et al (2006)). …”

Section: One-factor Shifted Gamma Lévy Modelmentioning

confidence: 99%

Lévy Processes and the Financial Crisis: Can We Design a More Effective Deposit Protection?

Maccaferri¹,

Cariboni²,

Schoutens³

2012

International Journal of Financial Research

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Deposit Guarantee Schemes (DGSs) are institutions whose main aim is to provide a safety net for depositors. If a bank fails, depositors will recover their bank deposits up to a certain limit. During the recent financial crisis, DGSs were brought at the centre of the political and financial debate, especially due to the fact that the some DGSs resulted incapable to react to the crisis because of the lack of funds set aside. In this paper we propose to use Lévy processes to simulate the loss distribution of deposits insured by a DGS in case of banks' failure. The simulated distribution can be used to design an effective DGS. By simulating banks' default and the corresponding losses, our model allows defining a target level for the funds to be collected in order to promptly and effectively respond to financial turmoil and protect the citizens. The proposed approach is applied to a sample of Italian banks. Disclaimer:The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed to the European Commission. Possible errors and omissions are those of the authors.

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“…Signi cant e ort have been made to develop consistent models, see [23] for a comparison between top down and bottom up approaches and [32] for a comparison of di erent copulas in the CreditRisk+ framework. Standard copula models had however limited empirical success and other frameworks have been developed, see [3,11,14,17,21,22,27,31,33,40]. In this paper, we develop bottom-up models that are both simple to calibrate and successful at reproducing all the tranche spreads.…”

Section: Introductionmentioning

confidence: 99%

Dependent defaults and losses with factor copula models

Ackerer¹,

Vatter

2017

Dependence Modeling

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Abstract:We present a class of exible and tractable static factor models for the term structure of joint default probabilities, the factor copula models. These high-dimensional models remain parsimonious with paircopula constructions, and nest many standard models as special cases. The loss distribution of a portfolio of contingent claims can be exactly and e ciently computed when individual losses are discretely supported on a nite grid. Numerical examples study the key features a ecting the loss distribution and multi-name credit derivatives prices. An empirical exercise illustrates the exibility of our approach by tting credit index tranche prices.

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A Generic One-Factor Lévy Model for Pricing Synthetic CDOs

Cited by 56 publications

References 15 publications

Basket Option Pricing and Implied Correlation in a One-Factor Lévy Model

Basket Option Pricing and Implied Correlation in a One-Factor Lévy Model

Lévy Processes and the Financial Crisis: Can We Design a More Effective Deposit Protection?

Dependent defaults and losses with factor copula models

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