Individual names in top-down CDO pricing models

The Gaussian copula collapsed as a means of pricing collateralised debt obligations in the crisis of 2008, as to match prices and deltas nonsensical correlation parameters were required. By adapting the traditional framework to cater for more general distributions, Dariusz Gatarek shows how to ensure any market delta can be matched, without losing the simplicity of the approach

This article has three aims. The first is to present a new top-down approach to collateralised debt obligation (CDO) tranche pricing that: admits a natural interpretation of model parameters in terms of individual spreads; fits to all potential default distributions; is suitable for individual names and bespoke CDOs; is consistent with equity, currency and interest rate models, and hence suitable for hybrid products; has a natural extension to dynamic modelling, credit options and random

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