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
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: Suggested Citation
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