Implied Correlation of CDO─Taiwan Study
Date Issued
2008
Date
2008
Author(s)
Tao, Ya-Lan
Abstract
Historical default correlation of reference portfolio lacks predictability for CDO pricing, so default correlation needs to be implied from CDS index and Tranche Index traded by market investors. There are two ways , one is 「Compound Correlation」 and the other one is 「Base Correlation」。Base Correlation can improve the phenomenon of correlation smile and multiple solutions for Compound Correlation。It also can price bespoke tranche。The most popular approach is JPMorgan’s Base Correlation。 If the reference portfolio is inconsistent with the index reference portfolio,the solution is to use黃裕烈(2006) model to simulate market fair spreads of index and every tranches。But when using Taiwanese data and Base Correlation,the default probability is underestimated。Future researches will be focused on fitting the cumulated default probability for Taiwanese market。
Subjects
CDO
Tranches
Type
thesis
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