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Extension of Spot Recovery Model for Gaussian Copula

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Author Info
Li, Hui
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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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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Related research
Keywords: CDO; Gaussian Copula; Stochastic Recovery; Spot Recovery Model;

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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. "On Models of Stochastic Recovery for Base Correlation," MPRA Paper 15750, University Library of Munich, Germany, revised 15 Oct 2009. [Downloadable!]
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This page was last updated on 2009-12-19.

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