Abstract:
Financial institutions have been facing difficulties over the years for a wide variety of reasons, however, the last financial crises has shown that the leading source of problems is the insufficient credit risk management. The credit derivatives market was the most innovative and fastest growing derivative market during the past ten years. The rapid development was due to new possibilities that are offered by credit derivatives. Among them, the most widely traded were collateralized debt obligations (CDO).
The main aim of this research is to analyse the dynamics in the CDO modelling. We apply copula models to fit spreads of CDO tranches and then investigate the dynamic evolution of the calibrated parameters. Our aim is to improve the understanding of the risk associated with trading credit derivatives.
