Isaac Newton Institute for Mathematical Sciences

City Event "Credit"

Modelling Correlation Skew via Mixing Copulae and Uncertain Loss at Default".

26th February 2005

Author: Lutz Schloegl (Lehman Brothers)

Abstract

We discuss aspects of the correlation skew in portfolio credit derivatives, in particular the relationship between implied and base correlation for tranches. We present a model which generates correlation skews by mixing copulae and introducing stochastic loss given default variables. This allows us to present a whole range of arbitrage-free base correlation curves.