Explaining the Levy base correlation smile

Since the introduction of the one-factor Gaussian copula model for pricing synthetic collateralised debt obligation (CDO) tranches by Andersen, Sidenius & Basu (2003), correlation has been seen as an exogenous parameter used to match observed market quotes. First the market adopted the concept of implied compound correlation. One of the problems of this approach is its unsuitability for interpolation. The current widespread market approach is to use the concept of base correlation introduced by

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: