Dynamic Hedging of Portfolio Credit Derivatives

  title={Dynamic Hedging of Portfolio Credit Derivatives},
  author={Rama Cont and Yu Hang Kan},
  journal={SIAM J. Financial Math.},
We compare the performance of various hedging strategies for index collateralized debt obligation (CDO) tranches across a variety of models and hedging methods during the recent credit crisis. Our empirical analysis shows evidence for market incompleteness: a large proportion of risk in the CDO tranches appears to be unhedgeable. We also show that, unlike what is commonly assumed, dynamic models do not necessarily perform better than static models, nor do high-dimensional bottom-up models… CONTINUE READING
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