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On Models of Stochastic Recovery for Base Correlation

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Author Info
Li, Hui
Abstract

This paper discusses various ways to add correlated stochastic recovery to the Gaussian Copula base correlation framework for pricing CDOs. Several recent models are extended to more general framework. It is shown that, conditional on the Gaussian systematic factor, negative forward recovery rate may appear in these models. This suggests that current static copula models of correlated default and recovery processes are inherently inconsistent.

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File URL: http://mpra.ub.uni-muenchen.de/15750/
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File URL: http://mpra.ub.uni-muenchen.de/16272/
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File URL: http://mpra.ub.uni-muenchen.de/17894/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15750.

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Date of creation: 15 Jun 2009
Date of revision: 15 Oct 2009
Handle: RePEc:pra:mprapa:15750

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Related research
Keywords: CDO; Gaussian Copula; Base Correlation; Stochastic Recovery; Correlated Loss Given Default;

Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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  1. Li, Hui, 2009. "Extension of Spot Recovery Model for Gaussian Copula," MPRA Paper 17944, University Library of Munich, Germany. [Downloadable!]
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