wilmott.com

Hi all,I would like to compute a VBA model that calculates base correlation based several inputs including spreads. Can someone send me some information or even has a similar model?Thanks!

I am thinking of using this base correlation model and modify to get the correlations for the CMBX ? Any comments or objections?

Dear all,Reading thisQuoteOriginally posted by: Gillthe base correlation is not flat it's upward sloping!I'm wondering : why BC curve rho(x) (=BC of the 0-x% tranche) should be increasing wrt to the attachment point (x) ? What should be increasing, for sure, is the EL(x) function (=EL of the 0-x tranche). That's pretty clear. However, I don't see the link that would imply that BC curve should (theoretically) also be strictly increasing wrt to the attachment point x.... - If it can be proved that rho(x) is monotoneously increasing, then I agree that it makes more sense to interpolate "smoothly" the BC curve from the standard BC points, and that, from that perspective, BC benefits from another advantage compared to implied correl, in addition to the uniqueness.- If rho(x) is not necessarily increasing, then I see no reason for claiming that Base correlations provide a nicer framework to price non-standard tranche compared to the implied correlation one. Thanks for your help !

Upward sloping base correlation is a market observed phenomenon. It makes practical sense that the theory does not fully capture. The situation is a bit similar to the volatility smile/skew in options market. Base correlation is a market implied value. The traded price is not only about the fundamental factors (like how correlated default events are) but also significantly affected by technicals. Those who trading equity tranche and the senior tranche could be different groups of investors. The general view is realised loss won't affect anyone high up the capital structure *unless* the correlation is very high. This accounts for the upward sloping curve. But the base correlation curve can assume other shapes.