A Dynamic Correlation Modelling Framework with Consistent Stochastic Recovery

Yadong Li

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: Credit; Correlation; CDO; Dynamic; Copula; Stochastic Recovery; Bottom-up; Top-down (search for similar items in EconPapers)
JEL-codes: C02 D40 (search for similar items in EconPapers)
Date: 2009-02-26, Revised 2009-04-02
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (4)

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https://mpra.ub.uni-muenchen.de/20457/2/MPRA_paper_20457.pdf revised version (application/pdf)

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