Geometrical Loss Model
37 Pages Posted: 4 Feb 2009 Last revised: 15 Jun 2016
Date Written: February 4, 2009
Abstract
In this paper, we present the Geometrical Loss Model. The GLM will allow for a tractable approach for CDO pricing and risk management. We introduce the concept of Base Volatility. We stress-test the model on the market data over the period 2005-2008, wich include the correlation crisis in 2005 and the recent credit crunch as well as the boom period of structured credit product in 2005 and 2006. The base volatilities increase during the boom period and decrease during the recessions. With GLM we resolved as well the issues of negative deltas and zero price of the tranche [60%, 100%]. We give numerical examples in which we show a perfect match to market data, for CDX.
Keywords: CDO, Tranche, Base Correlation, Base Volatility, CDS, CDX, Structured Credit
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
A Top-Down Approach to Multi-Name Credit
By Kay Giesecke, Lisa R. Goldberg, ...
-
Calibration of CDO Tranches with the Dynamical Generalized-Poisson Loss Model
By Damiano Brigo, Andrea Pallavicini, ...
-
Time-Changed Birth Processes and Multi-Name Credit Derivatives
By Kay Giesecke, Xiaowei Ding, ...
-
Affine Point Processes and Portfolio Credit Risk
By Eymen Errais, Kay Giesecke, ...
-
Semi-Analytical Valuation of Basket Credit Derivatives in Intensity-Based Models
-
Risk Neutral Versus Objective Loss Distribution and CDO Tranches Valuation
By Roberto Torresetti, Damiano Brigo, ...
-
Estimating Tranche Spreads by Loss Process Simulation
By Baeho Kim and Kay Giesecke
-
Implied Expected Tranched Loss Surface from CDO Data
By Roberto Torresetti, Damiano Brigo, ...
-
Multiscale Intensity Models and Name Grouping for Valuation of Multi-Name Credit Derivatives
By Evan Papageorgiou and Ronnie Sircar