Series editor(s): Thomas B. Fomby, R. Carter Hill, Ivan Jeliazkov, Juan Carlos Escanciano, Eric Hillebrand
Subject Area: Economics
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|Title:||Fast solution of the Gaussian copula model|
|Volume:||22 Editor(s): Jean-Pierre Fouque, Thomas B. Fomby, Knut Solna ISBN: 978-1-84855-196-1 eISBN: 978-1-84855-197-8|
|Citation:||Bjorn Flesaker (2008), Fast solution of the Gaussian copula model, in Jean-Pierre Fouque, Thomas B. Fomby, Knut Solna (ed.) Econometrics and Risk Management (Advances in Econometrics, Volume 22), Emerald Group Publishing Limited, pp.1-13|
|DOI:||10.1016/S0731-9053(08)22001-3 (Permanent URL)|
|Publisher:||Emerald Group Publishing Limited|
|Article type:||Chapter Item|
This article describes a new approach to compute values and sensitivities of synthetic collateralized debt obligation (CDO) tranches in the market-standard, single-factor, Gaussian copula model with base correlation. We introduce a novel decomposition of the conditional expected capped portfolio loss process into “intrinsic value” and “time value” components, derive a closed form solution for the intrinsic value, and describe a very efficient computational scheme for the time value, taking advantage of a curious time stability of this quantity.
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