A Comparative Analysis Of Correlation Skew Modeling Techniques For CDO Index Tranches
Source: Munich Personal Repec Archive
In this paper the authors present an analysis of CDO pricing models with a focus on "Correlation skew models". These models are extensions of the classic single factor Gaussian copula and may generate a skew. They consider examples with fat tailed distributions, stochastic and local correlation which generally provides a closer fit to market quotes. They present an additional variation of the stochastic correlation framework using normal inverse Gaussian distributions. The numerical analysis is carried out using a large homogeneous portfolio approximation.