Dynamic hedging of synthetic CDO tranches with spread risk and default contagion

Journal of Economic Dynamics and Control

Volumn 34, Issue 4, 2010, Pages 710-724

  Frey, Rüdiger ^a   Backhaus, Jochen ^a  

^a UNIVERSITY OF LEIPZIG   (Germany)

Author keywords

Credit derivatives; Default contagion; Dynamic hedging; Incomplete markets; Portfolio credit risk

Indexed keywords

EID: 77950299227     PISSN: 01651889     EISSN: None     Source Type: Journal    
DOI: 10.1016/j.jedc.2009.10.013     Document Type: Article

References (27)

1. Andersen L., Sidenius J. Extensions to the Gaussian copula: random recovery and random factor loadings. Journal of Credit Risk 2004, 1:29-70.
2. Arnsdorf, M., Halperin, I., 2007. BSLP: Markovian bivariate spread-loss model for portfolio credit derivatives. Working paper, available from 〈〉. http://arXiv.org/abs/0901.3398.
3. Backhaus, J., 2008. Pricing and hedging of credit derivatives in a model with interacting default intensities: a Markovian approach. Ph.D. Thesis, Department of mathematics, Universität Leipzig.
4. Bielecki, T., Crepey, S., Jeanblanc, M., 2009. Up and down credit risk. Preprint, Evry University, available on 〈〉. http://www.defaultrisk.com.
5. Bielecki T., Jeanblanc M., Rutkowski M. Hedging of defaultable claims. Paris-Princeton Lectures on Mathematical Finance, Springer Lecture Notes in Mathematics 2004, vol. 1847. Springer, Berlin.
6. Bielecki T., Jeanblanc M., Rutkowski M. Hedging of basket credit derivatives in the credit default swap market. Journal of Credit Risk 2007, 3:91-132.
7. Bielecki, T., Vidozzi, A., Vidozzi, L., 2008. A Markov copulae approach to pricing and hedging of credit index derivatives and rating-triggered step-up bonds. Journal of Credit Risk, to appear.
8. Brémaud P. Point Processes and Queues: Martingale Dynamics 1981, Springer, New York.
9. Colwell D., El-Hassan N., Kwon O.K. Hedging diffusion processes by local risk minimization with applications to index tracking. Journal of Economic Dynamics and Control 2007, 31:2135-2151.
10. Cont, R., Minca, A., 2008. Recovering portfolio default intensities implied by CDO quotes. Working paper, Center for Financial Engineering, Columbia University, available from 〈〉. http://ssrn.com/abstract=1104855.
11. Crépey, S., Carmona, R., 2008. Importance sampling and interacting particles for the estimation of Markovian credit portfolio loss distributions. Preprint, Evry University, International Journal of Theoretical and Applied Finance, forthcoming.
12. Davis M., Lo V. Infectious defaults. Quantitative Finance 2001, 1:382-387.
13. El Karoui N., Jeanblanc-Picqué M., Shreve S. Robustness of the Black and Scholes formula. Mathematical Finance 1998, 8:93-126.
14. Elouerkhaoui, Y., 2006. Etude des Problèmes de Corrélation et d'Incomplétude dans les Marchés de Crédit. Ph.D. Thesis, Université Paris IX Dauphine (in English).
15. Föllmer, H., Schweizer, M., 1991. Hedging of contingent-claims under incomplete information. In: Applied Stochastic Analysis. Gordon & Breach, London, pp. 205-223.
16. Föllmer H., Sondermann D. Hedging of non-redundant contingent-claims. Contributions to Mathematical Economics 1986, 147-160. North-Holland, Amsterdam. W. Hildenbrand, A. Mas-Colell (Eds.).
17. Frey R., Backhaus J. Pricing and hedging of portfolio credit derivatives with interacting default intensities. International Journal of Theoretical and Applied Finance 2008, 11(6):611-634.
18. Giesecke, K., Goldberg, L., 2007. A top-down approach to multi-name credit. Working Paper, Department of Management Science and Engineering, Stanford University.
19. Giesecke K., Weber S. Credit contagion and aggregate losses. Journal of Economic Dynamics and Control 2006, 30:741-767.
20. Herbertsson A. Pricing synthetic CDO tranches in a model with default contagion using the matrix-analytic approach. The Journal of Credit Risk 2008, 4:3-35.
21. Jarrow R., Yu F. Counterparty risk and the pricing of defaultable securities. Journal of Finance 2001, 56:1765-1799.
22. Laurent, J., Cousin, A., Fermanian, J., 2008. Hedging default risk of CDOs in Markovian contagion models. Working paper, ISFA Actuarial School, Université de Lyon.
23. Lopatin, A., Misirpashaev, T., 2007. Two-dimensional Markovian model for dynamics of adequate credit loss. Working paper, available from 〈〉. http://www.defaultrisk.com.
24. Neugebauer, M., 2006. Understanding and hedging risks in synthetic CDO tranches. Fitch Special Report.
25. Rosen D., Saunders D. Analytical methods for hedging systematic credit risk with linear factor portfolios. Journal of Economic Dynamics and Control 2009, 33:37-52.
26. Schönbucher, P., 2006. Portfolio loss and the term-structure of loss transition rates: a new methodology for the pricing of portfolio credit derivatives. Working paper, ETH Zürich.
27. Schweizer M. A guided tour through quadratic hedging approaches. Option Pricing, Interest Rates and Risk Management 2001, 538-574. Cambridge University Press, Cambridge. E. Jouini, J. Cvitanic, M. Musiela (Eds.).