BFS 2002

Contributed Talk

Risk Based Valuation of CDO structures

Ludger Overbecjk

In the talk we present some concepts in the valuation of portfolio dependent structures like Collaterized Debt Obligations or Basket Credit Derivative. The starting point is the structural approach similar to Merton's Asset Value Model. For a small set of underlying credits as in Credit Derivatives we model the default time as a first hitting time of a transformation of a multivariate correlated Brownian motion. We discuss three different approaches to match the distribution of the first hitting time with the forward default probability curve. In the second part of the presentation larger collateral pools, as for CDO or ABS-structures, are considered. The term structure of defaults in different tranches of the CDO is analysed and compared with term structures implied by corporate bond ratings. The analysis is based on the approximation of annual losses in the collateral portfolio by different distribution functions.