Loss in translation

Ben De Prisco, Ian Iscoe and Alex Kreinin introduce a new analytical approach for valuing synthetic collateralised debt obligations. The approach differs from current analytical approaches by focusing on the tranche's loss distribution directly, as opposed to a preliminary determination of the entire pool's loss distribution. Using a compound Poisson approximation, the pool's losses are translated directly into the tranche's losses. The result is a more efficient valuation – both in terms of memory and speed – for investors owning few tranches in the overall pool

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