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Extensions of the gaussian copula Venue: Centre for Mathematical Sciences

Saturday 26th February 2005 - 11:00 to 12:00
No Room Required

With the dual pourpose of investigating short-comings of the Gaussian copula model and of modelling the correlation "skew" observed in the CDO market, we describe extensions to the Gaussian copula model which incorporate random recovery and random (level dependent) factor loadings, respectively. We discuss the calibration of these new models and their respective impact on CDO tranche prices. The main conclusion is that when properly calibrated, the random recovery extension does not give rise to a significant skew, whereas the random factor loading model can generate a wide range of skews, including those observed in the market.

University of Cambridge Research Councils UK
    Clay Mathematics Institute London Mathematical Society NM Rothschild and Sons