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Model specification and collateralized debt obligation (mis)pricing

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Luo, Dan, Yongjun Tang, Dragon and Wang, Sarah Qian (2018) Model specification and collateralized debt obligation (mis)pricing. Journal of Futures Markets, 38 (11). pp. 1284-1312. doi:10.1002/fut.21932 ISSN 0270-7314.

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Official URL: https://doi.org/10.1002/fut.21932

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Abstract

Complex structured products, especially collateralized debt obligations (CDOs), were at the center of the 2008 credit crisis. This paper explores the impact of modeling difficulties on CDO mispricing. Comparing pricing outputs among models with different specifications, we show that the use of a model with advanced default correlation assumptions could have reduced the amount of model‐implied AAA‐rated CDO securities. This pricing difference also has predictive power for the subsequent downgrading of AAA‐rated CDO tranches. However, the model specification is only qualitatively important for CDO mispricing, as it has a modest quantitative effect in explaining the overall pricing errors.

Item Type: Journal Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH): Collateralized debt obligations -- Mathematical models, Global Financial Crisis, 2008-2009
Journal or Publication Title: Journal of Futures Markets
Publisher: John Wiley & Sons Ltd.
ISSN: 0270-7314
Official Date: November 2018
Dates:
DateEvent
November 2018Published
5 July 2018Available
6 March 2018Accepted
Volume: 38
Number: 11
Page Range: pp. 1284-1312
DOI: 10.1002/fut.21932
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
Date of first compliant deposit: 7 March 2018
Date of first compliant Open Access: 5 July 2020
RIOXX Funder/Project Grant:
Project/Grant IDRIOXX Funder NameFunder ID
71302075/G0206[NSFC] National Natural Science Foundation of Chinahttp://dx.doi.org/10.13039/501100001809
HKU 17510016Research Grants Council, University Grants Committeehttp://dx.doi.org/10.13039/501100002920

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