We empirically investigate the importance of parameter uncertainty to bond investors. Using a Bayesian approach, we quantify the expected utility loss due to parameter uncertainty from following seemingly optimal dynamic portfolio strategies. Expected utility losses are increasing in the number...

This study deals with the dynamic hedging of single-tranche collateralized debt obligations (STCDOs). As a first step, we specify a top-down affine factor model in which a catastrophic risk component is incorporated in order to capture the dynamics of super-senior tranches. Next, we derive the...

We propose an affi ne two-factor model for the pricing of single-tranche collateralized debt obligations by following the general top-down framework introduced in Filipovic et al. [2011]. Apart from being analytically tractable, this model has the feature that it incorporates a catastrophic risk...

This paper provides a coherent method for scenario aggregation addressing model uncertainty. It is based on divergence minimization from a reference probability measure subject to scenario constraints. An example from regulatory practice motivates the definition of five fundamental criteria that...