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Pricing models for collateralized debt obligations

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dc.contributor.advisor Gleeson, James P. Hurley, Julie 2011-12-09T13:33:37Z 2011-12-09T13:33:37Z 2011
dc.description peer-reviewed en_US
dc.description.abstract One of the most controversial and innovative finnancial products in recent years has been collateralised debt obligations (CDOs). Much of the blame for the current credit crisis is being attributed to the mathematical models and quantitative methods associated with these credit derivatives. In recent years, there has been rapidly growing research on credit derivatives and correlated defaults and in this thesis we examine the possible replacement of current copula based approaches with intuitive contagion models for percolation on nite networks. We propose that modelling the probability of default in a correlated portfolio is similar to modelling the probability of default of contagion spreading in a network. In the rst part of our thesis we review current models from the literature that have been suggested to price CDOs. From the literature review we noted that the critical input in the pricing of a CDO is an estimate of the default dependence (default correlation) between the underlying names in a portfolio. Dependency modelling with copula functions, introduced by Li (2000), has become a market standard in the pricing of CDOs. We compute the default distribution for both the Gaussian and student t4 copulas by implementing both a Monte Carlo and theoretical approach. We then compare these copulas ability to t market data. In the second part of our thesis we begin by introducing some of the earliest network models proposed by Paul Erd}os and Alfr ed R enyi. We show how similar to component sizes on a network being related to contagion on a network, it is possible then to compute the probability of default for a portfolio of names using network percolation. We present the nite and in nite network models used to model the default dependency between names in a portfolio and thus extend the in nite network model to compute the probability of default for a CDO portfolio. We nally compare the percolation model, Gaussian and Student t4 copulas to market data and from our results determine that the percolation model provides a better t to market data than the Gaussian and Student t4 copulas. en_US
dc.language.iso eng en_US
dc.publisher University of Limerick en_US
dc.subject debt obligations en_US
dc.subject mathematical en_US
dc.title Pricing models for collateralized debt obligations en_US
dc.type Master thesis (Research) en_US
dc.type.supercollection all_ul_research en_US
dc.type.supercollection ul_published_reviewed en_US
dc.type.supercollection ul_theses_dissertations en_US
dc.type.restriction none en

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