Isaac Newton Institute for Mathematical Sciences

City Event "Credit"

Matching base correlation skew with a naturally time-homogeneous model

Author: Mark Joshi (Royal Bank of Scotland)

Abstract

We introduce a new financially motivated model for pricing portfolio credit derivatives. It naturally matches the base correlation skew whilst achieving time-homogeneity; two features lacking in the market-standard Gaussian copula model. The model is easily calibrated and allows effective pricing of exotic credit derivatives such as CDO-squareds.