Factor models for credit correlation

Credit default swaps (CDSs) represent insurance contracts on individual obligors, synthetic collateralised default obligations (CDOs) represent various tranches of baskets backed by CDSs and cash CDOs are backed by corporate bonds, mortgages and other assets. Originally, the Gaussian Copula approach was used to price CDO tranches (see, for example, Li (2000)). Unfortunately, in its basic form it is incapable of reproducing market prices. Several researchers have tried to generalise it with some

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