Pierre Collin-Dufresne

On the Relative Pricing of Long Maturity Index Options and Collateralized Debt Obligations

Coauthor(s): Robert Goldstein, Fan Yang.

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Abstract:
We investigate a structural model of market and firm-level dynamics in order to jointly price long-dated S&P 500 index options and CDO tranches of corporate debt. We identify market dynamics from index option prices, and idiosyncratic dynamics from the term structure of credit spreads. We find that all tranches can be well priced out-of-sample before the crisis. During the crisis, however, our model can capture senior tranche prices only if we allow for the possibility of a catastrophic jump. Thus, senior tranches are non-redundant assets that provide a unique window into the pricing of catastrophic risk.

Source: Journal of Finance
Exact Citation:
Collin-Dufresne, Pierre, Robert Goldstein, and Fan Yang. "On the Relative Pricing of Long Maturity Index Options and Collateralized Debt Obligations." Journal of Finance 67, no. 6 (December 2012): 1983-2014.
Volume: 67
Number: 6
Pages: 1983-2014
Date: 12 2012