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| Base Expected Loss explains Lévy Base Correlation Smile by João Garcia of Dexia Group, July 28, 2007 Abstract: In an earlier paper we introduced Lévy base correlation. In this paper we look at base expected loss at maturity both in the Gaussian copula and Lévy based models and link it to base correlation in these frameworks. We report on the existence of smile in both base correlation curves and discuss different interpolation methodologies in view of absence of arbitrage. Finally we discuss the properties of these curves for tranchlet pricing purposes. Keywords: Base Expected Loss, Base Correlation, CDO, Loss Distribution, Lévy Process, Gaussian Copula, Interpolation, Absence of Arbitrage. New Book by these authors:
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