A Dynamic Correlation Modelling Framework with Consistent Stochastic Recovery
AbstractThis paper describes a flexible and tractable bottom-up dynamic correlation modelling framework with a consistent stochastic recovery specification. In this modelling framework, only the joint distributions of default indicators are determined from the calibration to the index tranches; and the joint distribution of default time and spread dynamics can be changed independently from the CDO tranche pricing by applying one of the existing top-down methods to the common factor process. Numerical results showed that the proposed modelling method achieved good calibration to the index tranches across multiple maturities under the current market conditions. This modelling framework offers a practical approach to price and risk manage the exotic correlation products.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 14919.
Date of creation: 26 Feb 2009
Date of revision: 02 Apr 2009
Credit; Correlation; CDO; Dynamic; Copula; Stochastic Recovery; Bottom-up; Top-down;
Find related papers by JEL classification:
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- D40 - Microeconomics - - Market Structure and Pricing - - - General
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