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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
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Official URL: https://doi.org/10.1002/fut.21932
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 | |||||||||
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| Subjects: | H Social Sciences > HG Finance | |||||||||
| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| 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 | |||||||||
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| 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 | |||||||||
| RIOXX Funder/Project Grant: |
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