CDO model: Large Homogeneous Pool Model, with Gauss-Hermite Integration
by Domenico Picone of Dresdner Kleinwort, Marco Stoeckle of Dresdner Kleinwort, Priya Shah of Dresdner Kleinwort, and Andrea Loddo of Dresdner Kleinwort
September 2008
Abstract:
In the first part of our series we release the Large Homogenous Pool Model using the Gauss-Hermite Integration technique.
Given the simplified assumptions behind this model, it is not a pricing tool for CDO tranches but instead is the first step to allow the user to appreciate the impact of key parameters such as correlation, recovery and spread on the value of a specific tranche.
Additionally, as the pool is considered to have an infinite and identical number of obligors, aspects such as idiosyncratic risk are not specifically treated. We will relax and analyse these points in the upcoming models.
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