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A comparative analysis of correlation skew modeling techniques for CDO index tranches

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  • Claudio, Ferrarese

Abstract

In this work we present an analysis of CDO pricing models with a focus on “correlation skew models”. These models are extensions of the classic single factor Gaussian copula and may generate a skew. We consider examples with fat tailed distributions, stochastic and local correlation which generally provide a closer fit to market quotes. We present an additional variation of the stochastic correlation framework using normal inverse Gaussian distributions. The numerical analysis is carried out using a large homogeneous portfolio approximation.

Suggested Citation

  • Claudio, Ferrarese, 2006. "A comparative analysis of correlation skew modeling techniques for CDO index tranches," MPRA Paper 1668, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:1668
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    File URL: https://mpra.ub.uni-muenchen.de/1668/1/MPRA_paper_1668.pdf
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    References listed on IDEAS

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    7. Jeffery D Amato & Jacob Gyntelberg, 2005. "CDS index tranches and the pricing of credit risk correlations," BIS Quarterly Review, Bank for International Settlements, March.
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    More about this item

    Keywords

    default risks; CDOs; index tranches; factor model; copula; correlation skew; stochastic correlation;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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