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Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity by Frédéric Patras, Damiano Brigo, Tomasz R. Bielecki

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Chapter 9

Valuation of Structured Finance Products with Implied Factor Models

Jovan Nedeljkovic

R2 Financial Technologies

Dan Rosen

R2 Financial Technologies and The Fields Institute

David Saunders

University of Waterloo, Canada

The recent credit crisis has highlighted limitations of the industry’s general understanding and risk management practices regarding structured credit portfolios. Market participants clearly misunderstood and underestimated the risks in many securities, especially with respect to the default correlation, systematic risk, and contagion effects. In particular, pricing models for asset-backed security (ABS) types and collateralized debt obligation (CDO) securities have been often overly simplistic, with many institutions ...

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