In this paper we propose a model to evaluate the performance of a Constant Proportion Debt Obligation (CPDO) and assess its rating. We model credit spread evolution in a HJM framework and default events for CPDO are generated by using a reduced form approach. Implementing a numerical algprithm that simulates the strategy of a CPDO, we obtain a rating for CPDO by using Monte Carlo simulations. We find a rating inferior to the one assigned by rating agencies. using our model for credit spread dynamics, the revealed default probability for CPDO could have been predicted.
Why did CPDOs fail? An analysis focused on credit spread modeling
MUSTI, SILVANA
2010
Abstract
In this paper we propose a model to evaluate the performance of a Constant Proportion Debt Obligation (CPDO) and assess its rating. We model credit spread evolution in a HJM framework and default events for CPDO are generated by using a reduced form approach. Implementing a numerical algprithm that simulates the strategy of a CPDO, we obtain a rating for CPDO by using Monte Carlo simulations. We find a rating inferior to the one assigned by rating agencies. using our model for credit spread dynamics, the revealed default probability for CPDO could have been predicted.File in questo prodotto:
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