We extend the common Poisson shock framework reviewed for example in Lindskog and McNeil (2003) to a formulation avoiding repeated defaults, thus obtaining a model that can account consistently for single name default dynamics, cluster default dynamics and default counting process. This approach...

We illustrate the two main types of implied correlation one may obtain from market CDO tranche spreads. Compound correlation is more consistent at single tranche level but for some market CDO tranche spreads cannot be implied. Base correlation is less consistent but more flexible and can be...

We explain how the payoffs of credit indices and tranches are valued in terms of expected tranched losses (ETL). ETL are natural quantities to imply from market data. No-arbitrage constraints on ETL's as attachment points and maturities change are introduced briefy. As an alternative to the...

The price of a CMS based derivative is largely affected by the value of swaption volatilities at extreme strikes. In this article, we propose a very simple procedure for stripping consistently implied volatilities and CMS adjustments from the market quotes of swaption smiles and CMS swap spreads

In this article, we propose a simple interest rate model, which can well accommodate swaption smiles, while recovering market prices of CMS swap spreads. The model is based on a (possibly multi-factor) Gaussian short rate model coupled with parameter uncertainty. Examples of calibration to real...

We consider the risk neutral loss distribution as implied by index CDO tranche quotes through a quot;scenario default ratequot; model as opposed to the objective measure loss distribution based on historical analysis. The risk neutral loss distribution turns out to privilege large realizations...

After a brief review of the literature on rating arbitrage for corporate and structured finance, we introduce the standard criteria adopted by rating agencies to assess riskiness of Constant Proportion Debt Obligations (CPDO). Then, we propose a new rating model in order to incorporate a more...

We present the derivation of the self-financing condition used in a derivative pricing framework with funding, collateral and discounting. This is done in a way that clarifies the structure of the relevant funding accounts. This clarification is achieved by properly distinguishing between price...

The purpose of this paper is introducing rigorous methods and formulas for bilateral counterparty risk credit valuation adjustment (CVA) on interest-rate portfolios. In doing so, we summarize the general arbitrage-free valuation framework for counterparty risk adjustments in presence of...