Description
Book SynopsisThe recent financial crisis has highlighted the need for better valuation models and risk management procedures, better understanding of structured products, and has called into question the actions of many financial institutions.
Table of ContentsPreface. Acknowledgements.
About the Authors.
Notation and List of Symbols.
1 Introduction: Credit Modelling Pre- and In-Crisis.
1.1 Bottom-up models.
1.2 Compound correlation.
1.3 Base correlation.
1.4 Implied Copula.
1.5 Expected Tranche Loss Surface.
1.6 Top (down) framework.
1.7 GPL and GPCL models.
1.8 Structure of the book.
2 Market Quotes.
2.1 Credit indices.
2.2 CDO tranches.
3 Gaussian Copula Model and Implied Correlation.
3.1 One-factor Gaussian Copula model.
3.1.1 Finite pool homogeneous one-factor Gaussian Copula model.
3.1.2 Finite pool heterogeneous one-factor Gaussian Copula model.
3.1.3 Large pool homogeneous one-factor Gaussian Copula model.
3.2 Double-t Copula Model.
3.3 Compound correlation and base correlation.
3.4 Existence and non-monotonicity of market spread as a function of compound correlation.
3.5 Invertibility limitations of compound correlation: pre-crisis.
3.6 Base correlation.
3.7 Is base correlation a solution to the problems of compound correlation?
3.8 Can the Double-t Copula flatten the Gaussian base correlation skew?
3.9 Summary on implied correlation.
4 Consistency across Capital Structure: Implied Copula.
4.1 Calibration of Implied Copula.
4.2 Two-stage regularization.
4.3 Summary of considerations around Implied Copula.
5 Consistency across Capital Structure and Maturities: Expected Tranche Loss.
5.1 Index and tranche NPV as a function of ETL.
5.2 Numerical results.
5.3 Summary on Expected (Equity) Tranche Loss.
6 A Fully Consistent Dynamical Model: Generalized-Poisson Loss Model.
6.1 Loss dynamics.
6.2 Model limits.
6.3 Model calibration.
6.4 Detailed calibration procedure.
6.5 Calibration results.
7 Application to More Recent Data and the Crisis.
7.1 Compound correlation in-crisis.
7.2 Base correlation in-crisis.
7.3 Implied Copula in-crisis.
7.4 Expected Tranche Loss surface in-crisis.
7.4.1 Deterministic piecewise constant recovery rates.
7.5 Generalized-Poisson Loss model in-crisis.
8 Final Discussion and Conclusions.
8.1 There are more things in heaven and earth, Horatio. . . .
8.2 . . . Than are dreamt of in your philosophy.
Bibliography.
Index.
