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Base-Correlation for LCDX9 Tranches?
Posted: December 19th, 2007, 7:30 pm
by SurferD
Hi all,does anyone have experience using the Gaussian Copula with Base-Correlation for LCDX9 Tranches?Regards,SurferD
Base-Correlation for LCDX9 Tranches?
Posted: December 30th, 2007, 4:43 pm
by PlasticSaber
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.
Base-Correlation for LCDX9 Tranches?
Posted: February 19th, 2008, 10:12 am
by Primo
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.
Base-Correlation for LCDX9 Tranches?
Posted: February 26th, 2008, 3:11 pm
by cksh2005
Base-Correlation for LCDX9 Tranches?
Posted: February 27th, 2008, 10:21 am
by Zub
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?
Base-Correlation for LCDX9 Tranches?
Posted: February 27th, 2008, 5:32 pm
by Primo
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.