HEDGING OF SYNTHETIC CDO TRANCHES WITH SPREAD AND DEFAULT RISK BASED ON A COMBINED FORECASTING APPROACH

2019 ◽  
Vol 22 (02) ◽  
pp. 1850057
Author(s):  
WEN-QIONG LIU ◽  
WEN-LI HUANG
Keyword(s):  
Default Risk ◽  
Credit Derivatives ◽  
Point Of View ◽  
Gaussian Copula ◽  
Collateralized Debt Obligations ◽  
Market Theory ◽  
Hedging Strategies ◽  
Hedge Ratios ◽  
Local Intensity ◽  
Combined Forecasting

Hedging of credit derivatives, especially the Collateralized Debt Obligations (CDOs), is the prerequisite of risk management in financial market. Since both spread risk and default risk exist, the models in existing literature resort to the incomplete-market theory to derive the hedging strategies. From another point of view, the construction of hedging strategies of CDO might be regarded as the process of forecasting the changes in value of CDO by the changes in value of hedging instruments. Based on this idea, this paper proposes an alternative hedging approach via the combined forecasting and regression techniques, where the two individual forecasting models are Gaussian copula model and local intensity model, used to hedge against spread risk and default risk, respectively. Finally, the dynamic hedge ratios of CDO tranches with CDS index are derived. A numerical analysis is carried out and the hedge ratios obtained by the new models are compared with those from actual market spreads. It is shown that the model derived in this paper not only provides hedging strategies which agree with the market hedge ratios but that can be effectively implemented as well.

INFORMATIONALLY DYNAMIZED GAUSSIAN COPULA

2013 ◽  
Vol 16 (02) ◽  
pp. 1350008 ◽  
Author(s):  
S. CRÉPEY ◽  
M. JEANBLANC ◽  
D. WU
Keyword(s):  
Credit Risk ◽  
State Space ◽  
Cox Model ◽  
Credit Derivatives ◽  
Point Of View ◽  
Gaussian Copula ◽  
Copula Model ◽  
Counterparty Risk ◽  
Gaussian Distributions ◽  
Augmented State

In order to dynamize the static Gaussian copula model of portfolio credit risk, we introduce a model filtration made of a reference Brownian filtration progressively enlarged by the default times. This yields a multidimensional density model of default times, where, as opposed to the classical situation of the Cox model, the reference filtration is not immersed into the enlarged filtration. In mathematical terms this lack of immersion means that martingales in the reference filtration are not martingales in the enlarged filtration. From the point of view of financial interpretation this means default contagion, a good feature in the perspective of modeling counterparty wrong-way risk on credit derivatives. Computational tractability is ensured by invariance of multivariate Gaussian distributions through conditioning by some components, the ones corresponding to past defaults. Moreover the model is Markov in an augmented state-space including past default times. After a discussion of different notions of deltas, the model is applied to the valuation of counterparty risk on credit derivatives.

scholarly journals Improvements of Rackwitz–Fiessler Method for Correlated Structural Reliability Analysis

2019 ◽  
Vol 17 (06) ◽  
pp. 1950077 ◽  
Author(s):  
Sheng-Tong Zhou ◽  
Qian Xiao ◽  
Jian-Min Zhou ◽  
Hong-Guang Li
Keyword(s):  
Structural Reliability ◽  
Pearson Correlation ◽  
Computational Cost ◽  
Transformation Process ◽  
Point Of View ◽  
Gaussian Copula ◽  
Normal Space ◽  
Copula Theory ◽  
Geometric Point ◽  
Nataf Transformation

Rackwitz–Fiessler (RF) method is well accepted as an efficient way to solve the uncorrelated non-Normal reliability problems by transforming original non-Normal variables into equivalent Normal variables based on the equivalent Normal conditions. However, this traditional RF method is often abandoned when correlated reliability problems are involved, because the point-by-point implementation property of equivalent Normal conditions makes the RF method hard to clearly describe the correlations of transformed variables. To this end, some improvements on the traditional RF method are presented from the isoprobabilistic transformation and copula theory viewpoints. First of all, the forward transformation process of RF method from the original space to the standard Normal space is interpreted as the isoprobabilistic transformation from the geometric point of view. This viewpoint makes us reasonably describe the stochastic dependence of transformed variables same as that in Nataf transformation (NATAF). Thus, a corresponding enhanced RF (EnRF) method is proposed to deal with the correlated reliability problems described by Pearson linear correlation. Further, we uncover the implicit Gaussian copula hypothesis of RF method according to the invariant theorem of copula and the strictly increasing isoprobabilistic transformation. Meanwhile, based on the copula-only rank correlations such as the Spearman and Kendall correlations, two improved RF (IRF) methods are introduced to overcome the potential pitfalls of Pearson correlation in EnRF. Later, taking NATAF as a reference, the computational cost and efficiency of above three proposed RF methods are also discussed in Hasofer–Lind reliability algorithm. Finally, four illustrative structure reliability examples are demonstrated to validate the availability and advantages of the new proposed RF methods.

Die Stabilität von Finanzmärkten:Wie kann die Wirtschaftspolitik Vertrauen schaffen?

2006 ◽  
Vol 55 (1) ◽  
Author(s):  
Theresia Theurl ◽  
Jan Pieter Krahnen ◽  
Thomas P. Gehrig
Keyword(s):  
Credit Risk ◽  
Financial Markets ◽  
Financial Market ◽  
Financial Institutions ◽  
Banking Sector ◽  
Public Awareness ◽  
Credit Derivatives ◽  
Point Of View ◽  
Regulatory Oversight ◽  
The Creation

AbstractFrom Theresia Theurl’s point of view financial markets exhibit certain features that turn them inherently unstable. Therefore, economic policy measures were necessary and advisable, but they should not take the shape of isolated and selected interventions. Rather, these measures of financial market supervision and regulation had to be integrated into a comprehensive concept of micro- and macroeconomic policy in order to allow the creation of stabilizing trust.In his contribution, Jan Pieter Krahnen maintains, that the systemic risk of banks and financial institutions has changed and risen in recent years. According to his view, this is due to a more widespread use of credit derivatives. Although they may cause a more efficient distribution of credit risk in the banking sector, at the same time they could mean a higher vulnerability of the banking sector to system-wide contagion effects of credit risk. As such, financial market supervision as well as the Basel II rules on Capital Standards should take into account not only the credit risk exposure of individual financial institutions, but also correlation measures of their share prices.For Thomas Gehrig, empirical anomalies demonstrate the relevance of awareness and trust in financial markets. This note would argue in favor of social policies that enhance public awareness in financial markets as a basis for trust. And so naturally, these policies need to be complemented by a strong financial order that aims at minimizing behavioral risks. He says, trust requires a regulatory framework that reduces manipulation by private as well as public interests. A competitive order complemented by strong regulatory oversight may go a long way towards generating liquid financial markets and the creation of trust. Trust by individuals, however, would be most strongly encouraged when individuals are entrusted in managing their own financial market activities including their own pension arrangements.

Risk Management with KOSDAQ50 Index Futures Markets

2003 ◽  
Vol 11 (2) ◽  
pp. 51-79
Author(s):  
Gyu Hyeon Mun ◽  
Jeong Hyo Hong
Keyword(s):  
Garch Model ◽  
Minimum Variance ◽  
Price Risk ◽  
Risk Minimization ◽  
Index Futures ◽  
Hedging Strategies ◽  
Hedging Effectiveness ◽  
Hedge Ratios ◽  
Sample Data ◽  
Hedging Performance

This paper studies hedging strategies that use the KOSDAQ50 index futures to hedge the price risk of the KOSDAQ50 index spot portfolio. This study uses the minimum variance hedge model and bivariate ECT-GARCH (1,1) model as hedging models, and analyzes their hedging performances. The sample period covers from January 31, 2001 to December 31, 2002. The most important findings may be summarized as follows. First, both the risk-minimization and GARCH model exhibit hedge ratios that are substantially lower than one. Hedge ratios of the risk-minimization tend to be higher than those of GARCH model. Second, for the in-sample data, hedging effectiveness of GARCH model is higher than that of the risk-minimization, while for the out-of-sample data, hedging effectiveness of the risk-minimization with constant hedge ratios is not far behind the GARCH model in its hedging performance. Third, the hedging performance of KOSDAQ50 index futures is lower than that of KOSPI200 index futures, but higher than that of KTB futures. In conclusion, in the KOSDAQ50 index market, investors are encouraged to use the simple risk-minimization model to hedge the price risk of KOSDAQ50 spot portfolios.

scholarly journals Mathematical Estimation Methods and Models for Industrial Companies

2021 ◽  
Vol 248 ◽  
pp. 03001
Author(s):  
Olga Stikhova
Keyword(s):  
Risk Estimation ◽  
Credit Derivatives ◽  
Secondary Market ◽  
Estimation Methods ◽  
Collateralized Debt Obligations ◽  
Industrial Companies ◽  
Modeling Process ◽  
Credit Default ◽  
Collateralized Debt ◽  
The Given

The collateralized debt obligations and credit default swaps applications are shown in this paper. The industry obligations secondary market risk estimation methods are considered in this work. The new methods taking into account statistically significant parameters for industrial credit derivatives portfolio are offered for single-name investment risks numerical experiments realization. The mathematical estimation of tranche were shown. The single and multiple name default obligations necessary mathematical modeling methods and formulae for the industrial materials manufacturers derivative credit tools market are shown. It is determined that the portfolio of synthetic debt tools is made of the given parameters. The task of a loss derivative tranches mathematical estimation is solved. Late defaults raise the equity tranches payment required sums with high spreads, early defaults reduce. Also the functional characteristics required for an estimation huge debts problem solving are partly considered in this paper. The problem of the default modeling for market tools and numerical simulation of the obligations influence on conditions of current bistability mode are shown here. Some credit derivatives of industrial manufacturers are demonstrated in the modeling process of default as an example. It is found that the model is an additional factor help us to estimate the default opportunity.

scholarly journals Credit Derivatives and the Default Risk of Large Complex Financial Institutions

2009 ◽  
Author(s):  
Giovanni Calice ◽  
Christos Ioannidis ◽  
Julian M. Williams
Keyword(s):  
Financial Institutions ◽  
Default Risk ◽  
Credit Derivatives ◽  
Large Complex
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