On the Relative Pricing of Long Maturity S&P 500 Index Options and CDX Tranches
Coauthor(s): Robert Goldstein, Fan Yu.
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We investigate a structural model of market and firm-level dynamics in order to jointly price
long-dated S&P 500 options and tranche spreads on the five-year CDX index. We demonstrate
the importance of calibrating the model to match the entire term structure of CDX index
spreads because it contains pertinent information regarding the timing of expected defaults
and the specification of idiosyncratic dynamics. Our model matches the time series of tranche
spreads well, both before and during the financial crisis, thus offering a resolution to the puzzle
reported by Coval, Jurek and Stafford (2009).
Source: Working Paper No. 15734
Collin-Dufresne, Pierre, Robert Goldstein, and Fan Yu. "On the Relative Pricing of Long Maturity S&P 500 Index Options and CDX Tranches." Working Paper No. 15734, NBER, February 2010.