Base Correlation loss model; interpolation is performed by portfolio
(live) amount percentage.\par
Though the literature on this model is inmense, see for a more than
introductory level (precrisis) chapters 19, 20 and 21 of Modelling single
name and multi-name credit derivatives. Dominic O'Kane, Wiley Finance,
2008\par
For freely available documentation see:\par
Credit Correlation: A Guide; JP Morgan Credit Derivatives Strategy;
12 March 2004 \par
Introducing Base Correlations; JP Morgan Credit Derivatives Strategy;
22 March 2004 \par
A Relative Value Framework for Credit Correlation; JP Morgan Credit
Derivatives Strategy; 27 April 2004 \par
Valuing and Hedging Synthetic CDO Tranches Using Base Correlations; Bear
Stearns; May 17, 2004 \par
Correlation Primer; Nomura Fixed Income Research, August 6, 2004 \par
Base Correlation Explained; Lehman Brothers Fixed Income Quantitative
Credit Research; 15 November 2004 \par
'Pricing CDOs with a smile' in Societe Generale Credit Research;
February 2005 \par
For bespoke base correlation see: \par
Base Correlation Mapping in Lehman Brothers' Quantitative Credit Research
Quarterly; Volume 2007-Q1 \par
You can explore typical postcrisis data by perusing some of the JPMorgan
Global Correlation Daily Analytics \par
Here the crisis model problems of ability to price stressed portfolios
or tranches over the maximum loss are the responsibility of the base models.
Users should select their models according to this; choosing the copula or
a random loss given default base model (or more exotic ones). \par
Notice this is different to a bespoke base correlation loss (bespoke here
refering to basket composition, not just attachment levels) ; where
loss interpolation is on the expected loss value to match the two baskets.
Therefore the correlation surface should refer to the same basket intended
to be priced. But this is left to the user and is not implemented in the
correlation surface (yet...)
todo
Bespoke portfolios BC models are yet to be implemented.
BaseModel_T must have a constructor with a single quote value
Criticism:
This model is not as generic as it could be. In principle a default loss
model dependent on a single factor correlation parameter is the only
restriction on the base loss model(s) type. This class however is tied to a
LatentModel single factor. But there is no need for the
underlying model to be of a latent type. This link is due to the copula
initialization traits which have to be present for non trivial copula
policies initialization (e.g. Student-T base correl models)
Maybe a possibility is to pass copiable instances of the model and relinking
to the correlation in two internal copies.
Base Correlation loss model; interpolation is performed by portfolio (live) amount percentage.\par Though the literature on this model is inmense, see for a more than introductory level (precrisis) chapters 19, 20 and 21 of Modelling single name and multi-name credit derivatives. Dominic O'Kane, Wiley Finance, 2008\par For freely available documentation see:\par Credit Correlation: A Guide; JP Morgan Credit Derivatives Strategy; 12 March 2004 \par Introducing Base Correlations; JP Morgan Credit Derivatives Strategy; 22 March 2004 \par A Relative Value Framework for Credit Correlation; JP Morgan Credit Derivatives Strategy; 27 April 2004 \par Valuing and Hedging Synthetic CDO Tranches Using Base Correlations; Bear Stearns; May 17, 2004 \par Correlation Primer; Nomura Fixed Income Research, August 6, 2004 \par Base Correlation Explained; Lehman Brothers Fixed Income Quantitative Credit Research; 15 November 2004 \par 'Pricing CDOs with a smile' in Societe Generale Credit Research; February 2005 \par For bespoke base correlation see: \par Base Correlation Mapping in Lehman Brothers' Quantitative Credit Research Quarterly; Volume 2007-Q1 \par You can explore typical postcrisis data by perusing some of the JPMorgan Global Correlation Daily Analytics \par Here the crisis model problems of ability to price stressed portfolios or tranches over the maximum loss are the responsibility of the base models. Users should select their models according to this; choosing the copula or a random loss given default base model (or more exotic ones). \par Notice this is different to a bespoke base correlation loss (bespoke here refering to basket composition, not just attachment levels) ; where loss interpolation is on the expected loss value to match the two baskets. Therefore the correlation surface should refer to the same basket intended to be priced. But this is left to the user and is not implemented in the correlation surface (yet...)
Bespoke portfolios BC models are yet to be implemented.
BaseModel_T must have a constructor with a single quote value
Criticism: This model is not as generic as it could be. In principle a default loss model dependent on a single factor correlation parameter is the only restriction on the base loss model(s) type. This class however is tied to a LatentModel single factor. But there is no need for the underlying model to be of a latent type. This link is due to the copula initialization traits which have to be present for non trivial copula policies initialization (e.g. Student-T base correl models)
Maybe a possibility is to pass copiable instances of the model and relinking to the correlation in two internal copies.