Valuation of a CDO with Implied Correlation and Base Correlation

• Main Authors: Tsung-yi Tsai, 蔡宗益
• Other Authors: An-sing Chen
• Format: Others
• Language: en_US
• Published: 2007
• Online Access: http://ndltd.ncl.edu.tw/handle/99152269555210980962

碩士 === 國立中正大學 === 財務金融所 === 95 === Abstract In general, the implied correlation is higher for equity and most senior tranches than for mezzanine tranches, which is known as the correlation smile. This paper uses Gaussian Copula and One-Factor Gaussian Copula methods to price CDO products, and compares two methods to examine why correlation smile occurs. We change different correlation dependency structures, and different copula functions in this paper. We want to test if the loss distribution or the correlation structures led to correlation smiles. We will use Base Correlation to solve this problem, and use implied correlation and base correlation in Taiwan product.