Pricing and integration of credit default swap index tranches

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

1 Scopus Citations
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Detail(s)

Original languageEnglish
Pages (from-to)503–526
Journal / PublicationJournal of Futures Markets
Volume40
Issue number4
Online published10 Dec 2019
Publication statusPublished - Apr 2020

Abstract

This paper first designs an efficient procedure to value Credit Default Swap Index tranches using an intensity-based model. The tranche spreads are effectively explained by a three-factor version of this model, both before and during the financial crisis of 2008. We then construct tradable tranche portfolios to track the intensity factors and compare the pricing of the tranches with equities and their derivatives. Our results show that the senior tranche spreads do not offer returns in excess of the common risk compensations in the equity and derivatives markets, while the junior tranche is not spanned by these standard factors.

Research Area(s)

  • collateralized debt obligation tranches, credit default swap index, default intensity, market integration, option smirk