Copula sensitivity in collateralized debt obligations and basket default swaps

This article empirically faces the lively debate over the choice of an appropriate copula function to be used to price and risk monitor some credit derivatives products. We consider the explicit pricing of collateralized debt obligations and basket default swaps, and empirically examine these credit derivatives within the copula framework. The results support in particular the choice of the T‐copula because of its greater flexibility in capturing the tail dependence. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:37–70, 2004