A Copula-Based Model of the Term Structure of CDO Tranches

We propose a model that uses copula functions to represent both cross-section and temporal dependence in basket od credit derivative and CDO tranches. The paper uses: i) a sequence of copula functions to represent the joint distribution of losses in each period; ii) a sequence of bivariate copula functions to represent the dependence structure between losses in each period and cumulated losses at the beginning of it. Based on this information, we propose an algorithm to propagate losses, and jointly recover the value of different tranches for the same maturity and those of the same tranche for different maturities. An illustrative application is proposed on the specific case of a CDX basket

Symmetry of functions and exchangeability of random variables

Copula, Exchangeability, Symmetry, Sobolev space, 60B10, 60E05, 62H05,

A measure of mutual complete dependence

Measure of dependence, Mutual complete dependence, Copulas, Sobolev norm,