Computing Base Correlation of CDX Equity Tranche

• Main Authors: Wei-Hao Fu, 傅韋豪
• Other Authors: Shyan-Yuan Lee
• Format: Others
• Language: zh-TW
• Published: 2010
• Online Access: http://ndltd.ncl.edu.tw/handle/31099400273909130920

碩士 === 國立臺灣大學 === 財務金融學研究所 === 98 === While pricing Collateral Debt Obligations, using base expected loss and piecewise quadratic interpolation can find the fair spreads for bespoke tranches without arbitrage. But, according to the master thesis of Mr. Lin Chung-Yao in 2008, the base correlation implied from the fair spreads calculated by base expected loss and piecewise quadratic interpolation would be smiling in the equity tranche. In order to improve the above-mentioned drawback, constructing a non-decreasing base correlation curve in the equity tranche would be the solution. My master thesis wants to construct a non-decreasing base correlation curve in the equity tranche by adding some constraints to the piecewise quadratic interpolation to avoid the smiling effect of the base correlation. In the future, comparing different spreads calculated from the different Copula models or different loss distributions would be an extensive research to find the fittest credit model to the market conditions.