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Extension of Spot Recovery Model for Gaussian Copula

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  • Li, Hui
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    Abstract

    Heightened systematic risk in the credit crisis has created challenges to CDO pricing and risk management. One important focus has been on the modeling of stochastic recovery. Different approaches within the Gaussian Copula framework have been proposed, but a consistent model was lacking until the recent paper of Bennani and Maetz [6] which shifted the modeling from period recovery to spot recovery. In this paper, we generalize their model to an arbitrary spot recovery distribution setup and extend the deterministic dependency on systematic factor to a random one. Besides, an extra parameter is introduced to control the correlation between default and recovery rate and the correlation between the recovery rates.

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    File URL: http://mpra.ub.uni-muenchen.de/17944/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17944.

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    Date of creation: 17 Oct 2009
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    Handle: RePEc:pra:mprapa:17944

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    Keywords: CDO; Gaussian Copula; Stochastic Recovery; Spot Recovery Model;

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    1. Li, Hui, 2009. "On Models of Stochastic Recovery for Base Correlation," MPRA Paper 15750, University Library of Munich, Germany.
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    Cited by:
    1. Li, Hui, 2010. "Downturn LGD: A Spot Recovery Approach," MPRA Paper 20010, University Library of Munich, Germany.
    2. Li, Hui, 2009. "Double Impact on CVA for CDS: Wrong-Way Risk with Stochastic Recovery," MPRA Paper 19684, University Library of Munich, Germany.

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