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

Ferrarese Claudio

MPRA Paper from University Library of Munich, Germany

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.

Keywords: default risks; CDOs; index tranches; factor model; copula; correlation skew; stochastic correlation (search for similar items in EconPapers)
JEL-codes: C02 C60 G12 (search for similar items in EconPapers)
Date: 2006-09-08
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:1668

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