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| The Implications of Implied Correlation by Roy Mashal of Lehman Brothers, July 2004 Abstract: Implied correlation is increasingly used for relative value considerations when comparing alternative investments in synthetic CDO tranches. Here we show that, by neglecting the heterogeneity of the underlying portfolio, implied correlation may lead to misleading relative value assessments. We argue that a modified implied correlation measure, which we call the "implied correlation bump", may be more appropriate for the relative value analysis of alternative tranched investments. Keywords: CDO, Implied Correlation. Published in: RISK, Vol. 17, No. 7, (July 2004), pp. 66-68. |
