On Models of Stochastic Recovery for Base Correlation

Hui Li

MPRA Paper from University Library of Munich, Germany

Abstract: This paper discusses various ways to add correlated stochastic recovery to the Gaussian Copula base correlation framework for pricing CDOs. Several recent models are extended to more general framework. It is shown that, conditional on the Gaussian systematic factor, negative forward recovery rate may appear in these models. This suggests that current static copula models of correlated default and recovery processes are inherently inconsistent.

Keywords: CDO; Gaussian Copula; Base Correlation; Stochastic Recovery; Correlated Loss Given Default (search for similar items in EconPapers)
JEL-codes: G32 G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg
Date: 2009-06-15, Revised 2009-10-15
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http://mpra.ub.uni-muenchen.de/15750/ orginal version
http://mpra.ub.uni-muenchen.de/16272/ revised version
http://mpra.ub.uni-muenchen.de/17894/ revised version

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Persistent link: http://EconPapers.repec.org/RePEc:pra:mprapa:15750

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