SERVING THE QUANTITATIVE FINANCE COMMUNITY

Jonathan81
Posts: 122
Joined: April 22nd, 2005, 6:25 am

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

Mr quant i don't think that your formula is good look at the formula p16 between local correlation (marginal compound correlation ) and base correlation

Jonathan81
Posts: 122
Joined: April 22nd, 2005, 6:25 am

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

last question aconze"and then mapping these strikes into strikes in the X domain using the large pool model"I don't see what are you talking about (N(xk)=L(K) ????)thank you

BLOBY
Posts: 113
Joined: May 17th, 2004, 5:07 am

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

Finally, does anyone try to implement Societe Generale's model ??

MrQuant
Posts: 48
Joined: February 21st, 2003, 11:17 pm

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

One of the thing that I observe is that when you compute Cumm Loss Distribution function from the continuous local correlation then the CDF is humped at the base but on the other hand a spiky local correlation gives a continuos local correlation.How it can be explained bcoz local correlation should give the right CDF ...?

MrQuant
Posts: 48
Joined: February 21st, 2003, 11:17 pm

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

Please ignore the previous reply............One of the thing that I observe is that when you compute Cumm Loss Distribution function from the continuous local correlation then the CDF is humped at the base but on the other hand a spiky local correlation gives a continuos CDF.How it can be explained bcoz local correlation should give the right CDF ...?

scholar
Posts: 832
Joined: October 17th, 2001, 8:03 pm

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

SurferD
Posts: 35
Joined: February 22nd, 2004, 2:00 pm

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

Hi all,has anyone tried to implement this model?Regards,SurferD

superpoincare
Posts: 3
Joined: September 23rd, 2003, 12:53 pm

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

Observer
Posts: 5
Joined: August 9th, 2004, 1:08 pm

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

It is an interesting idea. However the paper uploaded earlier contains several errors. This ends up with the formulas on page 9 as well most of appendix of the uploaded paper being incorrect.The main error is that individual A_j's are no londer normal, when rho(X) is not degenerate, but have a quite complicated distribution, which in fact depends on the function rho(.) itself (call it F(x;rho(.))). Therefore it is incorrect to write inverse normal cdf, for example, in the second equation on page 9 (for epsilon*) . They repeat the same mistake through out the appendix as well.Second of all, it is a mistake to say "Local correlation can be derived from this relationship by finding the roots of a second order polynomial equation" at the bottom of page 9. It is not a second-order equation. They just didn't notice that there is a term in it, namely, N^(-1)(p), which is in fact should be F^(-1)(p;rho(.)). Therefore the dependence on rho in this equation is much more complicated. I don't think it can be solved analitically. There could be some recursive numerical methods, but it requires an analysis of existence/uniqueness.Hope they find and correct the mistakes...Cheers...

colga
Posts: 14
Joined: March 2nd, 2004, 2:54 pm

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

Observer, you're right but I did some tests on this model and actually, this error (that we can assume as an approximation) has a small impact.and any way, we can find a anlalytic solution for this problem without using the approximation above. (using some numerical integration tough)

Zub
Posts: 115
Joined: December 13th, 2005, 1:04 pm

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

Finally, has someone verified the claimed robustness of such a model in the pricing of bespoke tranches?
Last edited by Zub on September 14th, 2006, 10:00 pm, edited 1 time in total.

Jonathan81
Posts: 122
Joined: April 22nd, 2005, 6:25 am

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

Observer : During "Les petits dejeuners de la Finance" Mr Turc presented a new version of local correlation with new slides and he said that it is a good approximation to take normal inverse of p even the it is not a normal.
Last edited by Jonathan81 on September 14th, 2006, 10:00 pm, edited 1 time in total.

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