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Fast solution of the Gaussian copula model

In: Econometrics and Risk Management

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  • Bjorn Flesaker

Abstract

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.

Suggested Citation

  • Bjorn Flesaker, 2008. "Fast solution of the Gaussian copula model," Advances in Econometrics, in: Econometrics and Risk Management, pages 1-13, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-9053(08)22001-3
    DOI: 10.1016/S0731-9053(08)22001-3
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