The original impetus behind the new indexes was a growing unease among dealers regarding default correlation. Rating agencies and issuers of synthetic collateralised debt obligation (CDO) tranches and portfolio derivatives tend to use standard portfolio models – such as the Moody’s KMV Portfolio Manager – in pricing and ratings. These models typically use empirical, bivariate asset correlations as inputs. A simple copula calculation generates expected default times for the portfolio, provi
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