Notes on exact and semi-exact Lévy models for the valuation of CDOs

Andreas Eichler; Heidrun Jentsch; Gunther Leobacher

doi:10.1142/S0219024910006078

Notes on exact and semi-exact Lévy models for the valuation of CDOs

Andreas Eichler, Heidrun Jentsch, Gunther Leobacher

Institute of Financial Mathematics and Applied Number Theory

Research output: Contribution to journal › Article › peer-review

Abstract

We investigate the effects of certain simplifying assumptions that are often made when valuating tranches of collateralised debt obligations (CDOs) using a firm's value approach. Those assumptions are the homogeneity and largeness of the portfolio and the so-called European approximation. The error made in this way is measured by comparing the result to a model with less simplification which is evaluated by the use of Monte Carlo simulation.

Original language	English
Pages (from-to)	979-1000
Number of pages	21
Journal	International Journal of Theoretical and Applied Finance
Volume	13
Issue number	6
DOIs	https://doi.org/10.1142/S0219024910006078
Publication status	Published - 2010

Fields of science

101 Mathematics
101007 Financial mathematics
101019 Stochastics
101025 Number theory

Access to Document

10.1142/S0219024910006078

Cite this

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abstract = "We investigate the effects of certain simplifying assumptions that are often made when valuating tranches of collateralised debt obligations (CDOs) using a firm's value approach. Those assumptions are the homogeneity and largeness of the portfolio and the so-called European approximation. The error made in this way is measured by comparing the result to a model with less simplification which is evaluated by the use of Monte Carlo simulation.",

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