Pricing and Integration of Credit Default Swap Index Tranches

Carverhill, Andrew and Dan Luo, 2019. Pricing and Integration of Credit Default Swap Index Tranches, Journal of Futures Markets, Forthcoming.

49 Pages Posted: 17 Mar 2011 Last revised: 24 Nov 2019

See all articles by Andrew P. Carverhill

Andrew P. Carverhill

City University of Hong Kong

Dan Luo

School of Finance, Shanghai University of Finance and Economics

Date Written: November 22, 2019

Abstract

This paper first designs an efficient procedure to value Credit Default Swap Index tranches using an intensity-based model. The tranche spreads are effectively explained by a three-factor version of this model, both before and during the financial crisis of 2008. We then construct tradable tranche portfolios to track the intensity factors and compare the pricing of the tranches with equities and their derivatives. Our results show that the senior tranche spreads do not offer returns in excess of the common risk compensations in the equity and derivatives markets, while the junior tranche is not spanned by these standard factors.

Keywords: Credit Default Swap Index, Collateralized Debt Obligation Tranches, Default Intensity, Option Smirk, Market Integration

JEL Classification: G11, G12, G13

Suggested Citation

Carverhill, Andrew Peter and Luo, Dan, Pricing and Integration of Credit Default Swap Index Tranches (November 22, 2019). Carverhill, Andrew and Dan Luo, 2019. Pricing and Integration of Credit Default Swap Index Tranches, Journal of Futures Markets, Forthcoming., Available at SSRN: https://ssrn.com/abstract=1786574 or http://dx.doi.org/10.2139/ssrn.1786574

Andrew Peter Carverhill

City University of Hong Kong ( email )

Department of Economics and Finance
Tat Chee Avenue, Kowloon Tong
Hong Kong, Hong Kong SAR 000000
China
+852 3442 9247 (Phone)

Dan Luo (Contact Author)

School of Finance, Shanghai University of Finance and Economics ( email )

Shanghai, 200433
China
+86-21-65904920 (Phone)

HOME PAGE: http://sof.shufe.edu.cn/80/46/c6894a98374/page.htm

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