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BLOBY
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Bespoked CDOs Implied Correlation with Heston model

August 9th, 2005, 10:52 am

Do you think it would be possible to use Heston model (1993) for Bespoked CDOs implied correlation calculation, in order to model the smile and the skew ???
 
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BLOBY
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Bespoked CDOs Implied Correlation with Heston model

August 11th, 2005, 10:44 am

Any ideas ??I know that a lot of quants use the methodology proposed by Andersen/Sidenius/Basu in the RISK November 2003 article and in addtional papers from Anderesen/Sidenius on this topic, but why did anybody adapt Heston model to credit correlation ?
 
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wahoo2000
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Bespoked CDOs Implied Correlation with Heston model

August 11th, 2005, 10:59 am

Are you suggesting to use the Heston model to describe the dynamics of the correlation factor from a copula model???
 
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BLOBY
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Bespoked CDOs Implied Correlation with Heston model

August 11th, 2005, 11:44 am

Yes, exactly.
 
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erstwhile
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Bespoked CDOs Implied Correlation with Heston model

August 11th, 2005, 2:03 pm

I guess you know that the Heston model is a stochastic vol model.Would you try and model the loss distribution as being the result of a random walk with stochastic vol?What would the underlying stochastic variable be? The number of defaults in the portfolio is stricly increasing...Fill us in on your idea.
 
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trinity
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Bespoked CDOs Implied Correlation with Heston model

August 11th, 2005, 2:07 pm

trying to model implied correlation makes no sense... modelling the expected loss, and the tranche value as a derivative of that, probably makes more sense
 
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BLOBY
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Bespoked CDOs Implied Correlation with Heston model

August 12th, 2005, 6:04 am

My idea would be to take recovery rate as the underlying stochastic variable.
 
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Gmike2000
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Bespoked CDOs Implied Correlation with Heston model

August 20th, 2005, 7:19 pm

as far as i know the bespoke tranches do not trade on a price determined in the market, but on a price determined by the dealers models. dealers know their models are not good, but as long as shit does not hit the fan they are quite happy with them (their risk controllers are too)modelling bespoke tranches therefore seems a bit redundant (model a dealers model?)...in the absence of good market determined prices how will you ever be able to verify that the new model works?
Last edited by Gmike2000 on August 19th, 2005, 10:00 pm, edited 1 time in total.
 
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BLOBY
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Bespoked CDOs Implied Correlation with Heston model

August 23rd, 2005, 11:50 am

No, I just try to fit (standard tranches) smile correlations to a model, in order to extrapolate it for bespoke tranches ... like local correlations models.
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