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On Models of Stochastic Recovery for Base Correlation

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  • Li, Hui

Abstract

This paper discusses various ways to add correlated stochastic recovery to the base correlation framework for pricing CDOs. Several recent models are extended to more general framework. The pros and cons of these models for calibration to single name CDS and index CDO tranches are discussed. It is shown that negative forward recovery rate under fixed systematic factor appears in these models. This suggests that current static copula models of correlated default and recovery processes are inherently inconsistent.

Suggested Citation

  • Li, Hui, 2009. "On Models of Stochastic Recovery for Base Correlation," MPRA Paper 15750, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:15750
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Li, Hui, 2010. "Downturn LGD: A Spot Recovery Approach," MPRA Paper 71986, University Library of Munich, Germany, revised 30 Apr 2013.
    2. Li, Hui, 2009. "Extension of Spot Recovery Model for Gaussian Copula," MPRA Paper 17944, University Library of Munich, Germany.
    3. Li, Hui, 2009. "Double Impact on CVA for CDS: Wrong-Way Risk with Stochastic Recovery," MPRA Paper 19684, University Library of Munich, Germany.
    4. repec:wsi:ijtafx:v:16:y:2013:i:03:n:s0219024913500131 is not listed on IDEAS
    5. Li, Hui, 2010. "Downturn LGD: A Spot Recovery Approach," MPRA Paper 20010, University Library of Munich, Germany.

    More about this item

    Keywords

    CDO; Gaussian Copula; Base Correlation; Stochastic Recovery; Correlated Loss Given Default;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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