Durand, Philippe, and Jouanin, Jean-Frédéric. "Some short elements on hedging credit derivatives." ESAIM: Probability and Statistics 11 (2007): 23-34. <http://eudml.org/doc/250117>.
@article{Durand2007,
abstract = {
In practice, it is well known that hedging a derivative instrument
can never be perfect. In the case of credit derivatives (e.g.
synthetic CDO tranche products), a trader will have to face some
specific difficulties. The first one is the inconsistence between
most of the existing pricing models, where the risk is the
occurrence of defaults, and the real hedging strategy, where the
trader will protect his portfolio against small CDS spread
movements. The second one, which is the main subject of this
paper, is the consequence of a wrong estimation of some parameters
specific to credit derivatives such as recovery rates or
correlation coefficients. We find here an approximation of the
distribution under the historical probability of the final Profit
& Loss of a portfolio hedged with wrong estimations of these
parameters. In particular, it will depend on a ratio between the
square root of the historical default probability and the
risk-neutral default probability. This result is quite general and
not specific to a given pricing model.
},
author = {Durand, Philippe, Jouanin, Jean-Frédéric},
journal = {ESAIM: Probability and Statistics},
keywords = {Credit derivatives; hedging; robustness.; credit derivatives; robustness},
language = {eng},
month = {3},
pages = {23-34},
publisher = {EDP Sciences},
title = {Some short elements on hedging credit derivatives},
url = {http://eudml.org/doc/250117},
volume = {11},
year = {2007},
}
TY - JOUR
AU - Durand, Philippe
AU - Jouanin, Jean-Frédéric
TI - Some short elements on hedging credit derivatives
JO - ESAIM: Probability and Statistics
DA - 2007/3//
PB - EDP Sciences
VL - 11
SP - 23
EP - 34
AB -
In practice, it is well known that hedging a derivative instrument
can never be perfect. In the case of credit derivatives (e.g.
synthetic CDO tranche products), a trader will have to face some
specific difficulties. The first one is the inconsistence between
most of the existing pricing models, where the risk is the
occurrence of defaults, and the real hedging strategy, where the
trader will protect his portfolio against small CDS spread
movements. The second one, which is the main subject of this
paper, is the consequence of a wrong estimation of some parameters
specific to credit derivatives such as recovery rates or
correlation coefficients. We find here an approximation of the
distribution under the historical probability of the final Profit
& Loss of a portfolio hedged with wrong estimations of these
parameters. In particular, it will depend on a ratio between the
square root of the historical default probability and the
risk-neutral default probability. This result is quite general and
not specific to a given pricing model.
LA - eng
KW - Credit derivatives; hedging; robustness.; credit derivatives; robustness
UR - http://eudml.org/doc/250117
ER -
