Beyond the Gaussian copula: stochastic and local correlation | Zendy

X. Burtschell | Zendy; Jonathan M. Gregory | Zendy; JeanPaul Laurent | Zendy

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Beyond the Gaussian copula: stochastic and local correlation

Author(s) -

X. Burtschell,

Jonathan M. Gregory,

JeanPaul Laurent

Publication year - 2007

Publication title -

the journal of credit risk

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.259

H-Index - 10

eISSN - 1755-9723

pISSN - 1744-6619

DOI - 10.21314/jcr.2007.059

Subject(s) - copula (linguistics) , econometrics , portfolio , correlation , gaussian , mathematics , statistical physics , economics , financial economics , physics , geometry , quantum mechanics

We consider "copula skew models" that account for the correlation smile in the pricing of synthetic CDO tranches. These can be viewed as stochastic or local correlation models and are extensions of the well-known one factor Gaussian copula model. We analyse these models through their conditional default probability distributions and marginal compound correlations. We also give some examples of using a particular stochastic correlation model to fit the market, illustrating the stability of the parameters over time. JEL Classification: C 31, G 13

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