Li, Hui (2009): On Models of Stochastic Recovery for Base Correlation.
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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.
|Item Type:||MPRA Paper|
|Original Title:||On Models of Stochastic Recovery for Base Correlation|
|Keywords:||CDO, Gaussian Copula, Base Correlation, Stochastic Recovery, Correlated Loss Given Default|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing|
|Depositing User:||Hui Li|
|Date Deposited:||18. Jun 2009 04:45|
|Last Modified:||19. Feb 2013 12:10|
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