On the Relative Pricing of Long-Maturity Index Options and Collateralized Debt Obligations

Pierre Collin-Dufresne, Robert S. Goldstein, Fan Yang

Research output: Contribution to journalArticle

33 Scopus citations

Abstract

We investigate a structural model of market and firm-level dynamics in order to jointly price long-dated S&P 500 index options and CDO tranches of corporate debt. We identify market dynamics from index option prices and idiosyncratic dynamics from the term structure of credit spreads. We find that all tranches can be well priced out-of-sample before the crisis. During the crisis, however, our model can capture senior tranche prices only if we allow for the possibility of a catastrophic jump. Thus, senior tranches are nonredundant assets that provide a unique window into the pricing of catastrophic risk.

Original languageEnglish (US)
Pages (from-to)1983-2014
Number of pages32
JournalJournal of Finance
Volume67
Issue number6
DOIs
StatePublished - Dec 1 2012

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