Li, Yadong (2009): A Dynamic Correlation Modelling Framework with Consistent Stochastic Recovery.
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This paper describes a flexible and tractable bottom-up dynamic correlation modelling framework with a consistent stochastic recovery specification. In this modelling framework, only the joint distributions of default indicators are determined from the calibration to the index tranches; and the joint distribution of default time and spread dynamics can be changed independently from the CDO tranche pricing by applying one of the existing top-down methods to the common factor process. Numerical results showed that the proposed modelling method achieved good calibration to the index tranches across multiple maturities under the current market conditions. This modelling framework offers a practical approach to price and risk manage the exotic correlation products.
|Item Type:||MPRA Paper|
|Original Title:||A Dynamic Correlation Modelling Framework with Consistent Stochastic Recovery|
|Keywords:||Credit; Correlation; CDO; Dynamic; Copula; Stochastic Recovery; Bottom-up; Top-down|
|Subjects:||C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods
D - Microeconomics > D4 - Market Structure and Pricing > D40 - General
|Depositing User:||Yadong Li|
|Date Deposited:||30. Apr 2009 00:28|
|Last Modified:||20. Feb 2013 19:43|
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