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Pricing and integration of credit default swap index tranches
Author(s) -
Carverhill Andrew,
Luo Dan
Publication year - 2020
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22082
Subject(s) - tranche , credit derivative , swap (finance) , itraxx , synthetic cdo , credit default swap , equity (law) , credit default swap index , index (typography) , credit risk , business , credit valuation adjustment , financial economics , economics , computer science , finance , world wide web , political science , law , credit reference
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.