Correlation at First Sight
Year: 2005
Type: article
Abstract: The synthetic collateralized debt obligation (CDO) market has, over the last year, seen a significant increase in liquidity and transparency. The availability of published prices such as TracX and iBoxx tranches permits the calibration of model parameters, which was not achievable a year ago. This paper details what we believe has become the market standard approach in CDO valuation. The valuation model is introduced and analysed in depth to develop a better practical understanding of its use and the implications of parameter selection and calibration. In particular, we examine the idea that correlation within a copula model can be seen to be an equivalent measure to volatility in a standard B&S option framework and, correspondingly, we seek to calibrate smile and skew.
Source: Economic Notes
Authors: Andrew Friend, Ebbe Rogge
Institutions: ABN AMRO Bank N.V. (Netherlands), Imperial College London
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2009344939