Study of Base Correlation under Different CDO Pricing Methods

• Main Authors: Yueh Lee, 李約
• Other Authors: Yi-Ping Chang
• Format: Others
• Language: zh-TW
• Published: 2009
• Online Access: http://ndltd.ncl.edu.tw/handle/66168401515974168042

碩士 === 東吳大學 === 財務工程與精算數學系 === 97 === Using a rule for prioritizing the cash flow payments to the issued CDO securities, it is possible to redistribute the credit risk of the pool of assets to create securities with a variety of risk profiles. In doing so, portfolio that consists of low liquidity or low credit quality assets can transformed into securities with a range of different risks that match investors with different risk preference. Using historical default correlation of reference portfolio may lose the predictability in CDO pricing. Hence a measure of default correlation is developed from the use of CDS index and Tranche index traded by market investors, it’s called implied correlation. There are two ways to obtain implied correlation, namely as Compound Correlation and Base Correlation. We adopt Base correlation in our analysis due to its better property. We use two methods in the CDO pricing - Law of Large Numbers and the Large Pool Model, as the number of assets approaches to infinity, the result is close to the theoretical value. By assuming that the number of assets is very large, our results showed that the Large Pool Model performs better than the Law of Large Numbers.