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aconze
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Societe Generale's "Pricing CDOs with a smile" paper

June 13th, 2005, 12:09 pm

has anyone tried to play with the local correlation CDO factor model proposed in Societe Generale's feb 2005 paper "Pricing CDOs with a smile" ? Is there a closed form formula for the unconditional distributions of individual assets ? otherwise it seems the model would be computationaly costly to use.
 
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creditderivative
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Societe Generale's "Pricing CDOs with a smile" paper

June 13th, 2005, 5:43 pm

Hi aconze,I haven't seen the SG piece yet. Would you mind posting it here?CD
 
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SurferD
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Societe Generale's "Pricing CDOs with a smile" paper

June 13th, 2005, 10:48 pm

Hi aconze,sounds exciting - how does the local correlation model work?Regards,SurferD
 
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aconze
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Societe Generale's "Pricing CDOs with a smile" paper

June 14th, 2005, 5:50 am

here is the paper. The model is similar to Andersen & Sidenius's, i.e. the i-th firm asset is X_i = beta(X) X + idiosyncratic with X the common factor(s). But the spec for beta() is different.
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QSUK0205B.zip
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silvione
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Societe Generale's "Pricing CDOs with a smile" paper

June 14th, 2005, 9:13 am

Do you have also this article of SG?Juiy 2004 Pricing and hedging of correlation products
 
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silvione
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Societe Generale's "Pricing CDOs with a smile" paper

June 14th, 2005, 9:13 am

Do you have also this article of SG?Juiy 2004 Pricing and hedging of correlation products
 
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aconze
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Societe Generale's "Pricing CDOs with a smile" paper

June 14th, 2005, 9:18 am

sureQuoteOriginally posted by: silvioneDo you have also this article of SG?Juiy 2004 Pricing and hedging of correlation products
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SGcorrelationresearch_July04.zip
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silvione
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Societe Generale's "Pricing CDOs with a smile" paper

June 14th, 2005, 9:23 am

Thank you aconze
 
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creditderivative
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Societe Generale's "Pricing CDOs with a smile" paper

June 14th, 2005, 10:59 am

aconze. I'll have a look at them this week.CD
 
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J
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Societe Generale's "Pricing CDOs with a smile" paper

June 14th, 2005, 3:35 pm

Welcome to enjoy French-English written reseach reports!is there any one famiar with how SG's relative value trader works?
 
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CompleteQuant
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Joined: April 9th, 2004, 12:50 pm

Societe Generale's "Pricing CDOs with a smile" paper

June 17th, 2005, 7:16 am

what a great paper. thanks a lot for posting it. feel like i learnt a lot by reading it.
 
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Julek
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Societe Generale's "Pricing CDOs with a smile" paper

June 24th, 2005, 1:34 pm

There is an amended version of this report. It was re-written in a slightly better english. A technical complement has been posted earlier this month, with a focus on how to factor in the real distribution of assets properly.SG has posted a detailed presentation on how to use the RV Trader. I guess you can ask it directly to them
 
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aconze
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Societe Generale's "Pricing CDOs with a smile" paper

June 24th, 2005, 1:36 pm

can you upload it ?
 
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MrQuant
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Societe Generale's "Pricing CDOs with a smile" paper

June 28th, 2005, 10:57 am

Has anyone tried implementing Local Correlation model by SGI am getting Cummulative Loss Distriution (> 1) for strikes (K > 5%) when I use the market law of losss as being refered in the appendix A.Market Law of Loss states that L(K,BaseCorr) = L(K)+ Skew(K)*Rho(K,BaseCorr)Rho(K,BaseCorr) = Senstivity of Expected Loss on the Equity Tranche (K) to the change in BaseCorrelation
 
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aconze
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Societe Generale's "Pricing CDOs with a smile" paper

June 29th, 2005, 9:23 am

I found that depending on the base correl model there can be some inconsistencies:you get the market distribution of losses as Prob(L > K) = d/dK D(K) where D(K) is the (undiscounted) price of the default leg of the 0-K tranche. With a base-correl model D(K) is computed as D(K) = f(K, baseCorr(K)) where f(K, rho) is the Gaussian Copula (undiscounted) price of a 0-K default leg at correlation rho, so you simply get Prob(L > K) = df/dK + d f/dbaseCorr * d baseCorr / dK (1)If the interpolation method baseCorr(K) as a function of K has discontinuous 1st derivative (that's the case with linear interpolation for instance) then the cumulative distribution function Prob(L > K) is discontinuous, which means it has some Dirachs on specific strikes! But Worse!: assume K* is such a 1st derivative discontinuity point. Then Prob(L = K*) = d f/dbaseCorr * (d baseCorr / dK (K*-) - d baseCorr / dK (K*+)), and if d baseCorr / dK (K*-) < d baseCorr / dK (K*+) then the Dirach mass is negative!!! In fact in (1) Prob(L > K) should be a decreasing function of K, therefore there are constraints on the base correl model (or rather I should say interpolation/extrapolation method) baseCorr(K) for the that model to be consistent. QuoteOriginally posted by: MrQuantHas anyone tried implementing Local Correlation model by SGI am getting Cummulative Loss Distriution (> 1) for strikes (K > 5%) when I use the market law of losss as being refered in the appendix A.Market Law of Loss states that L(K,BaseCorr) = L(K)+ Skew(K)*Rho(K,BaseCorr)Rho(K,BaseCorr) = Senstivity of Expected Loss on the Equity Tranche (K) to the change in BaseCorrelation
Last edited by aconze on June 28th, 2005, 10:00 pm, edited 1 time in total.
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