With the recent development of non-standard credit derivatives, it has become increasingly important to develop pricing models for these illiquid products which are consistent with the pricing models and the market quotes of related liquid instruments.

Svenja Hager aims at pricing non-standard illiquid portfolio credit derivatives which are related to standard CDO tranches with the same underlying portfolio of obligors. Instead of assuming a homogeneous dependence structure between the default times of different obligors, as it is assumed in the standard market model, the author focuses on the use of heterogeneous correlation structures. The intention is to find a correlation matrix sufficiently flexible so that all tranche spreads of a CDO structure can be reproduced simultaneously. This allows for consistent pricing. The calibrated model can then be used to determine the price of non-standard contracts. As there is no standard optimization technique to derive the correlation structure from market prices, Evolutionary Algorithms are applied.

Autorentext
Dr. Svenja Hager promovierte bei Prof. Dr.-Ing. Rainer Schöbel am Lehrstuhl für Betriebswirtschaftslehre, insbesondere Betriebliche Finanzwirtschaft, der Universität Tübingen. Sie ist als Kredit- und Marktrisiko-Expertin tätig.

Zusammenfassung
Collateralized Debt Obligations (CDOs) are the most prominent example of portfol- related credit derivatives. They make it possible to diversify and transfer credit risk by pooling and redistributing the risks of an underlying portfolio of defaultable assets. It comes as no surprise that the dependence structure of portfolio assets is crucial for the valuation of CDO tranches. The standard market model is the Gaussian copula model, which uses only one parameter to summarize the correlations of default times in the underlying credit portfolio. Comparable with the volatility smile from option pricing, this simpli?cation leads to an implied correlation smile when the model is confronted with market data. There is a growing interest in literature searching for solutions of this problem. Dr. Svenja Hager contributes to this literature by extending the Gaussian copula model, allowing for a heterogeneous speci?cation of the dependence structure of the underlying portfolio. She shows that heterogeneous correlation matrices are able to explain the correlation smile. Based on this discovery, she develops a method to ?nd the implied correlation matrix which optimally reproduces the observed tranche spreads of a CDO structure. To overcome the complexity of the resulting optimization problems, Evo- tionary Algorithms are applied successfully. This monographputs anew complexion onthe standardmarket modelandshouldthe- fore be recognized for its substantial contribution in this fascinating ?eld of research on credit derivatives.

Inhalt

Collateralized Debt Obligations: Structure and Valuation.- Explaining the Implied Correlation Smile.- Optimization by Means of Evolutionary Algorithms.- Evolutionary Algorithms in Finance: Deriving the Dependence Structure.- Experimental Results.- Summary and Outlook.