Fast solution of the Gaussian copula model

Bjorn Flesaker

A chapter in Econometrics and Risk Management, 2008, pp 1-13 from Emerald Group Publishing Limited

Abstract: This article describes a new approach to compute values and sensitivities of synthetic collateralized debt obligation (CDO) tranches in the market-standard, single-factor, Gaussian copula model with base correlation. We introduce a novel decomposition of the conditional expected capped portfolio loss process into “intrinsic value” and “time value” components, derive a closed form solution for the intrinsic value, and describe a very efficient computational scheme for the time value, taking advantage of a curious time stability of this quantity.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-9053(08)22001-3

DOI: 10.1016/S0731-9053(08)22001-3

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