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Optimal Bespoke CDO Design via NSGA-II
Joint Authors
Witten, Gareth
Jewan, Diresh
Guo, Renkuan
Source
Journal of Applied Mathematics and Decision Sciences
Issue
Vol. 2009, Issue 2009 (31 Dec. 2009), pp.1-32, 32 p.
Publisher
Hindawi Publishing Corporation
Publication Date
2009-03-29
Country of Publication
Egypt
No. of Pages
32
Main Subjects
Abstract EN
This research work investigates the theoretical foundations and computational aspects of constructing optimal bespoke CDO structures.
Due to the evolutionary nature of the CDO design process, stochastic search methods that mimic the metaphor of natural biological evolution are applied.
For efficient searching the optimal solution, the nondominating sort genetic algorithm (NSGA-II) is used, which places emphasis on moving towards the true Paretooptimal region.
This is an essential part of real-world credit structuring problems.
The algorithm further demonstrates attractive constraint handling features among others, which is suitable for successfully solving the constrained portfolio optimisation problem.
Numerical analysis is conducted on a bespoke CDO collateral portfolio constructed from constituents of the iTraxx Europe IG S5 CDS index.
For comparative purposes, the default dependence structure is modelled via Gaussian and Clayton copula assumptions.
This research concludes that CDO tranche returns at all levels of risk under the Clayton copula assumption performed better than the sub-optimal Gaussian assumption.
It is evident that our research has provided meaningful guidance to CDO traders, for seeking significant improvement of returns over standardised CDOs tranches of similar rating.
American Psychological Association (APA)
Jewan, Diresh& Guo, Renkuan& Witten, Gareth. 2009. Optimal Bespoke CDO Design via NSGA-II. Journal of Applied Mathematics and Decision Sciences،Vol. 2009, no. 2009, pp.1-32.
https://search.emarefa.net/detail/BIM-508570
Modern Language Association (MLA)
Jewan, Diresh…[et al.]. Optimal Bespoke CDO Design via NSGA-II. Journal of Applied Mathematics and Decision Sciences No. 2009 (2009), pp.1-32.
https://search.emarefa.net/detail/BIM-508570
American Medical Association (AMA)
Jewan, Diresh& Guo, Renkuan& Witten, Gareth. Optimal Bespoke CDO Design via NSGA-II. Journal of Applied Mathematics and Decision Sciences. 2009. Vol. 2009, no. 2009, pp.1-32.
https://search.emarefa.net/detail/BIM-508570
Data Type
Journal Articles
Language
English
Notes
Includes bibliographical references
Record ID
BIM-508570