Technical paper/Gaussian model
Cutting Edge introduction: Tales of tails
Tales of tails
Quadratic Gaussian inflation
Quadratic Gaussian inflation
Cutting Edge introduction: Computation, computation, computation
Computation, computation, computation
Quadratic Gaussian inflation
Quadratic Gaussian inflation
Risk 25: Cutting edge classics
Don’t say we didn’t warn you
Cutting Edge introduction: Hedging dependence
Hedging dependence
Market reaction to price changes and fat-tailed returns
Market reaction to price changes and fat-tailed returns
Perturbed Gaussian copula: introducing the skew effect in co-dependence
Gaussian copula models are often used in the industry when single-asset information is quoted but little is known about their joint relation. These models may arise from correlated stochastic Brownian processes with deterministic volatility and…
Perturbed Gaussian copula: introducing the skew effect in co-dependence
Perturbed Gaussian copula: introducing the skew effect in co-dependence
A new breed of copulas for risk and portfolio management
A new breed of copulas for risk and portfolio management
Capturing credit correlation between counterparty and underlying
Capturing credit correlation between counterparty and underlying
Post-shock short-rate pricing
Post-shock short-rate pricing
Pricing distressed CDOs with base correlation and stochastic recovery rates
In 2008 and 2009, the calibration of the standard Gaussian copula model for collateralised debt obligations has frequently broken down. To overcome that problem, Martin Krekel has embedded the model with correlated stochastic recovery rates. He shows…
A dynamic model for correlation
Equity markets have experienced a significant increase in correlation during the crisis, resulting in exotic derivatives portfolios realising large losses. As larger correlations in downward scenarios are already implied in the index option market in the…
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…
Pricing and hedging basket credit derivatives in the Gaussian copula
The static assumptions of the Gaussian copula model have long presented an obstacle to dynamic hedging of credit portfolio tranches. Here, Jean-David Fermanian and Olivier Vigneron combine the copula with a spread diffusion to derive hedging error as…
Putting the smile back on the face of derivatives
Cross-asset quadratic Gaussian models have been limited in the scale of their implementation by the difficulty in ensuring the correct drift conditions to omit arbitrage. Here, Paul McCloud shows how to exploit the symmetries of the functional form to…
Unbiased risk-neutral loss distributions
Luigi Vacca introduces entropy maximisation (ME) to derive portfolio loss probabilities that are consistent with standard tranche prices on a credit default swap index. Tranche prices that are calculated using ME are free of arbitrage. A numerical…
Time to adapt copula methods for modelling credit risk correlation
In an evolving market, a new standard for the price quotation of credit products that models correlated changes in credit spreads as well as default times is needed, argues Darrell Duffie.