Journal of Credit Risk
ISSN:
1744-6619 (print)
1755-9723 (online)
Editor-in-chief: Linda Allen and Jens Hilscher
A correlation estimation method for CDO equity
Jeffrey Prince
Abstract
ABSTRACT
Investors desire a simple but robust method of estimating return correlation between collateralized debt obligation (CDO) equity and other investments. Existing correlation estimation methods suffer from a dearth of data and complicated models. The proposed method, called correlation transitivity, permits investors to estimate correlation between CDO equity and alternative investments from correlation between the CDO collateral and the alternative investments. Correlation transitivity is simple to use and represents a powerful alternative to existing correlation estimation methods.
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