CDO term structure modelling with Levy processes and the relation to market models

Details CDO term structure modelling with Levy processes and the relation to market models CDO term structure modelling with Levy processes and the relation to market models

2010-07-10

arxiv.org/abs/1007.1706v2

Economy

Quantitative Finance

Pricing of Securities

16 pages

Scientific paper

This paper considers the modelling of collateralized debt obligations (CDOs). We propose a top-down model via forward rates generalizing Filipovi\'c, Overbeck and Schmidt (2009) to the case where the forward rates are driven by a finite dimensional L\'evy process. The contribution of this work is twofold: we provide conditions for absence of arbitrage in this generalized framework. Furthermore, we study the relation to market models by embedding them in the forward rate framework in spirit of Brace, Gatarek and Musiela (1997).

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