Abstract
Complex structured products especially collateralized debt obligations (CDOs) were at the center of the recent credit crisis. This paper explores two structural sources of CDO mispricing: modeling difficulty and data limitation. Comparing pricing outputs among models with different specifications, we find that using model with advanced default correlation assumptions and adequate data inputs can reduce the amount of model-implied AAA-rated CDO securities by 13% on average. This pricing difference has predictive power for the subsequent downgrading of AAA rated CDO tranches. These results indicate that CDO mispricing can be partly, but not fully, attributed to model misspecifications, as well as limited availability of historical data on CDO collateral assets.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
