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| A Comparative Analysis of Correlation Skew Modeling Techniques for CDO Index Tranches by Claudio Ferrarese of King's College London September 8, 2006 Abstract: In this work we present an analysis of CDO pricing models with a focus on "correlation skew models". These models are extensions of the classic single factor Gaussian copula and may generate a skew. We consider examples with fat tailed distributions, stochastic and local correlation which generally provide a closer fit to market quotes. We present an additional variation of the stochastic correlation framework using normal inverse Gaussian distributions. The numerical analysis is carried out using a large homogeneous portfolio approximation. Keywords: default risks, CDOs, index tranches, factor model, copula, correlation skew, stochastic correlation. Books Referenced in this paper: (what is this?)
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