NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On the Relative Pricing of long Maturity S&P 500 Index Options and CDX Tranches

Pierre Collin-Dufresne, Robert S. Goldstein, Fan Yang

NBER Working Paper No. 15734
Issued in February 2010
NBER Program(s):   AP

We investigate a structural model of market and firm-level dynamics in order to jointly price long-dated S&P 500 options and tranche spreads on the five-year CDX index. We demonstrate the importance of calibrating the model to match the entire term structure of CDX index spreads because it contains pertinent information regarding the timing of expected defaults and the specification of idiosyncratic dynamics. Our model matches the time series of tranche spreads well, both before and during the financial crisis, thus offering a resolution to the puzzle reported by Coval, Jurek and Stafford (2009).

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Document Object Identifier (DOI): 10.3386/w15734

Published: On the Relative Pricing of long Maturity Options an d Collateralized Debt Obligations," Pierre Collin- Dufresne, Robert S. Goldstein and Fan Yang, The Journal of Finance, Vol.67 No.6, 2012.

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