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Extension of Spot Recovery Model for Gaussian Copula

Author

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  • Li, Hui

Abstract

Heightened systematic risk in the credit crisis has created challenges to CDO pricing and risk management. One important focus has been on the modeling of stochastic recovery. Different approaches within the Gaussian Copula framework have been proposed, but a consistent model was lacking until the recent paper of Bennani and Maetz [6] which shifted the modeling from period recovery to spot recovery. In this paper, we generalize their model to an arbitrary spot recovery distribution setup and extend the deterministic dependency on systematic factor to a random one. Besides, an extra parameter is introduced to control the correlation between default and recovery rate and the correlation between the recovery rates.

Suggested Citation

  • Li, Hui, 2009. "Extension of Spot Recovery Model for Gaussian Copula," MPRA Paper 17944, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:17944
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    File URL: https://mpra.ub.uni-muenchen.de/17944/1/MPRA_paper_17944.pdf
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    References listed on IDEAS

    as
    1. Li, Hui, 2009. "On Models of Stochastic Recovery for Base Correlation," MPRA Paper 15750, University Library of Munich, Germany.
    2. Li, Yadong, 2009. "A Dynamic Correlation Modelling Framework with Consistent Stochastic Recovery," MPRA Paper 14919, University Library of Munich, Germany, revised 02 Apr 2009.
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    Cited by:

    1. Li, Hui, 2009. "Double Impact on CVA for CDS: Wrong-Way Risk with Stochastic Recovery," MPRA Paper 19684, University Library of Munich, Germany.
    2. Li, Hui, 2010. "Downturn LGD: A Spot Recovery Approach," MPRA Paper 20010, University Library of Munich, Germany.

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    2. Li, Hui, 2010. "Downturn LGD: A Spot Recovery Approach," MPRA Paper 20010, University Library of Munich, Germany.
    3. Yadong Li & Ariye Shater, 2010. "Valuation Bound of Tranche Options," Papers 1004.1759, arXiv.org.
    4. Li, Hui, 2010. "Downturn LGD: A Spot Recovery Approach," MPRA Paper 71986, University Library of Munich, Germany, revised 30 Apr 2013.
    5. Yadong Li, 2010. "Consistent Valuation of Bespoke CDO Tranches," Papers 1004.1758, arXiv.org.
    6. Li, Hui, 2009. "Double Impact on CVA for CDS: Wrong-Way Risk with Stochastic Recovery," MPRA Paper 19684, University Library of Munich, Germany.

    More about this item

    Keywords

    CDO; Gaussian Copula; Stochastic Recovery; Spot Recovery Model;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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