Prof. Masaaki Kijima, Graduate School of Economics, Tokyo Metropolitan University

Title: Risk Management and the Pricing of CDOs Based on the Multivariate Wang Transform

Abstract: We consider a CDO within the CreditMetrics framework for the purpose of risk manegement. We then apply the change of measure formula based on the multivariate Wang transform, which is consistent with Buhlmann's equilibrium pricing model, to evaluate the fair price of the CDO. The pricing formula is an extension of the one-factor Gaussian copula model, the standard market model for valuing CDO's. Unlike the existing models, our model calibrates the parameter associated with risk aversion index of the representative investor, not the correlation parameter. A t-copula model is also considered to describe the fat-tail distribution observed n the actual markets. Some numerical results are presented to show the usefulness of our model.