An Empirical Study Of The Pricing Of Chinese Collateralized Debt Obligations Based On Pair Copula

Collateralized Debt Obligation is a kind of credit derivative,which plays an important role in risk transfer and asset-liability management.Its issuance grows exponentially before the subprime crisis.During the crisis,the CDO issuance drops by 79.59%,from 398412.50 million dollars to 81306.72 million dollars.And recovers from 2011.The asset securitization process of China starts in 2005 where the asset pilot comes out.However,subject to the crisis,asset securitization process stopped between 2009 and 2011.The same trajectory of US and China indicates that there exists neglect of credit risk in CDO pricing.After the crisis,domestic CDO market gets through a rapid development,which also contains many risks.It calls for a reasonable pricing system for risk measurement.Therefore,study on CDO pricing is very important for the development of pricing theory and CDO market.In this paper,the method of pricing CDO products by using virtual CDO products is abandoned,we study the pricing of asset backed securities issued by ICBC in 2015.The main works are as follows:(1)constructing CDO pricing formula.According to the principle of return equals to default,namely the principle of arbitrage free pricing,the pricing formula of each sub coupon is given.(2)calculating the default probability of each obligator on the basis of KMV model,calculating the default intensity of the obligator by using default probability,and then calculating the marginal distribution of the default time.(3)using kernel density estimation method to estimate the marginal distribution of return rate of each obligator,and fitting the joint distribution of the obligators by Pair Copula function.Then using two stages maximum likelihood estimation to attain the parameters of Pair Copula function.(4)presenting method of simulate the default time by using Monte Carlo.Using the estimated models: Multivariate Archimedes Copula and Frank-D-Vine Copula to extract random number to simulate the default time of each obligator.(5)Calculating the price of each sub voucher according to relevant data of each obligator.Comparing different pricing models,evaluating the validity of Pair Copula pricing model and studying the impact of recovery rate on CDO pricing.The empirical analysis shows that the multivariate Archimedes Copula functions exist the risk of underestimating the default probability and the Gumbel Copula is best in fitting the empirical Copula,next is the Frank Copula and the Clayton Copula is the worst one;The pricing efficiency of the model based on vine structure and Frank Copula is better than the other three Archimedes Copulas and the Clayton Copula is the worst one in the Archimedes Copula group;The pricing models in this paper perform better in pricing the A1 layer and the A2 layer vouchers than the B layer voucher,which indicates that the B layer voucher may contain other risk except the risk of default;There is no obviously continuous change of CDO price dueto the change of recovery rate.The default recovery rate has effect on the pricing of each CDO vouchers.The pricing accuracy of each Copula model will increase and then decrease,when the default recovery rate changes from 0.4 to 0.6 and 0.8.It indicates that the real recovery rate lies between 0.4 and 0.8.