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CDO valuation with CDS implied default probabilities
A question about the valuation of CDO's. As an input, one needs probabilities of default of the reference assets. As I understand it, S&P, Moody's and Fitch have their own assumptions for default probabilities, based on historical data. Would it also be possible (and would it make sense) to use implied default probabilities calculated using Credit Default Swap spreads?With the implied default probabilities calculated according to this method: http://www.vcallc.com/mailings/addition ... reads2.htm
CDO valuation with CDS implied default probabilities
for pricing what you need is the risk neutral probability of default, hence implied from CDS
CDO valuation with CDS implied default probabilities
but as far as the literature I have read sofar (mostly from rating agencies), I have not read about any model using these CDS implied default probilities as input for their model. Does anybody know of any literature available about this topic?