Base-Correlation for LCDX9 Tranches?

SurferD · December 19th, 2007, 7:30 pm

Hi all,does anyone have experience using the Gaussian Copula with Base-Correlation for LCDX9 Tranches?Regards,SurferD

PlasticSaber · December 30th, 2007, 4:43 pm

Ummmm.... The Street is using single factor Gaussian Copula for everything -- including LCDX tranche. But, how to model the cancellation feature is up to anyone's imagination. People hack to make it "work". If you look at the tranche delta from different brokers, it is all over the places .... It is going to be a fun exercise for HY credit quants in 2008.

Primo · February 19th, 2008, 10:12 am

I beleive people are using the same framework as for CDX tranches. cancellation risk is quite low now.... given the market conditions, no one will be able to refinance.... However, recovery risk is a major risk and especially if you are running a book for both HY (senior unsecured) and LCDX (senior secured) risk.

cksh2005 · February 26th, 2008, 3:11 pm

http://papers.ssrn.com/sol3/papers.cfm? ... id=1008201

Zub · February 27th, 2008, 10:21 am

The paper below seems good, but there is no market data comparison of the model performance. With respect to Primo's comment: is he aware that 2 out of 100 in LCDX S8 have already undergone the cancellation event?

Primo · February 27th, 2008, 5:32 pm

Just a quick correction to what I said before. I spoke to LCDX trader and actually they are using a cancellation premium as well in the 5% p.a to 10% area ie cancellation probability is 5% per year. Hope it helps.