The Impossible Trio in CDO Modeling
AbstractWe show that stochastic recovery always leads to counter-intuitive behaviors in the risk measures of a CDO tranche - namely, continuity on default and positive credit spread risk cannot be ensured simultaneously. We then propose a simple recovery variance regularization method to control the magnitude of negative credit spread risk while preserving the continuity on default.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1012.0475.
Date of creation: Dec 2010
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-11 (All new papers)
- NEP-BAN-2010-12-11 (Banking)
- NEP-RMG-2010-12-11 (Risk Management)
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