Download manual (631K PDF) - DefaultRisk.com
Download manual (631K PDF) - DefaultRisk.com
Download manual (631K PDF) - DefaultRisk.com
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
CDO models: Opening the black box – Part four<br />
A risk management tool for CDOs<br />
Analysing default risk of credit portfolios and CDOs<br />
►<br />
►<br />
►<br />
►<br />
In our CDO model series we have so far released various models with increasing flexibility and sophistication<br />
While they all have the advantage of being analytical / closed form solution models, they require simplifying assumptions with respect to<br />
the way credits may default together<br />
Most importantly, they all use a factor model to generate joint default events<br />
If the way credits default together is introduced without a factor model:<br />
‣ We can’t apply the recursive algorithm anymore (as it depends on conditioning on a <strong>com</strong>mon factor)<br />
‣ However, Monte Carlo (MC) techniques can be used to simulate joint default events<br />
►<br />
►<br />
Within a MC approach, copulas allow for a very general and flexible way to directly model the dependency within the portfolio<br />
The current credit crisis has highlighted the importance of tail events in risk management. This model gives credit investors the tool to<br />
analyse the behaviour of their credit portfolio under stressed market conditions<br />
Copula model:<br />
https://research.dresdnerkleinwort.<strong>com</strong>/document/FILE.pdfSYSTEM=1020&REF=249388<br />
1