The 2007–2009 Financial Crisis and Credit Derivatives

  • Mmboniseni Mulaudzi
  • Mark Petersen
  • Janine Mukuddem-Petersen
Conference paper

Abstract

We discuss the relationship between investor payoffs and credit derivatives such as credit default swaps (CDSs) and mortgage-related collateralized debt obligations (CDOs). In this regard, we investigate the role that the interplay between these components played in the global financial crisis (GFC). More specifically, we develop a stochastic model for investor payoffs from investment in CDO tranches that are protected by CDSs. In a continuous-time framework, this model enables us to solve a stochastic optimal credit default insurance problem that has investor consumption and investment in structured mortgage products as controls. Finally, we provide numerical results involving mezzanine CDO tranches being hedged by CDSs and explain their link with the GFC.

Keywords

Collateralized debt obligation Credit default swap Credit derivatives Credit risk Global financial crisis Systemic risk 

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Copyright information

© Springer Science+Business Media Dordrecht 2014

Authors and Affiliations

  • Mmboniseni Mulaudzi
    • 1
  • Mark Petersen
    • 2
  • Janine Mukuddem-Petersen
    • 2
  1. 1.Department of Decision SciencesUniversity of South AfricaPretoriaSouth Africa
  2. 2.Faculty of Commerce and AdministrationNorth West UniversityMmabathoSouth Africa

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