Chapter 9
Valuation of Structured Finance Products with Implied Factor Models
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 ...
