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Title:A note on the correlation smile PDF Logo
Authors:Hager, Svenja
Schöbel, Rainer
Issue Date:2005
Series/Report no.:Tübinger Diskussionsbeitrag 297
Abstract:The correct modeling of default dependence is essential for the valuation of multiname credit derivatives. However for the pricing of synthetic CDOs a one-factor Gaussian copula model with constant and equal pairwise correlations, default intensities and recovery rates for all assets in the reference portfolio has become the standard market model. If this model were a reflection of market opinion there wouldn't be the implied correlation smile that is observed in the market. The purpose of this paper is to explain the structure of the smile by discussing the influence of different correlation matrices on CDO spreads.
Subjects:default risk
CDOs
implied correlation smile
correlation matrx
heterogeneity
JEL:G13
Persistent Identifier of the first edition:urn:nbn:de:bsz:21-opus-21079
Document Type:Working Paper
Appears in Collections:Tübinger Diskussionsbeiträge, Universität Tübingen

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