SPA / Schonbucher loss models - Update?

j20056 · June 29th, 2006, 4:44 pm

I wonder if the fact that there are no current discussions on this topic is a reflection of how valuable these approaches are, thence the reluctance of anyone to get into their details, or the fact that all the quants working on the implementation are currently deep into calibration and other technical issues?Is there an update of where things are at? Any new developments from other quants?

fodao · June 29th, 2006, 8:44 pm

I believe these models will only become more relevant if we start seeing a development of a marketfor CDO options. I don't think we are there quite yet. But that doesn't stop you from implementingand getting familiar with the model.

j20056 · June 30th, 2006, 12:44 am

i thought index options of different tenors as well as tranches of different tenors were enough to start, and CDO options would be a model implied product, at least to start?

fodao · June 30th, 2006, 3:03 am

CDO tranches with different maturities allow you to calibrate the initial distribution, even though it is not a trivial matter given the few points in the market. However how do you get the volatility? We can only treat it as a parameter, since we cannot imply yet from the market.

scholar · July 2nd, 2006, 5:48 pm

You can use volatilities of short-dated index option for calibration of these models