Alexios P. Polychronakos

  1. Correlation breakdown, copula credit default models and arbitrage.

    Authors: Rodanthy Tzani, Alexios P. Polychronakos
    Subjects: Pricing of Securities
    Abstract

    The recent "correlation breakdown" in the modeling of credit default swaps,
    in which model correlations had to exceed 100% in order to reproduce market
    prices of supersenior tranches, is analyzed and argued to be a fundamental
    market inconsistency rather than an inadequacy of the specific model. As a
    consequence, markets under such conditions are exposed to the possibility of
    arbitrage. The general construction of arbitrage portfolios under specific
    conditions is presented.

Syndicate content