Dynamic Modelling of Single-name Credits and CDO Tranches
by Martin Baxter of Nomura International, plc
March 20, 2006
Abstract: This paper presents a new model of the evolution of credits within a basket. This structural model uses a Levy process to have dynamics which are intuitive, which capture the heavy tails of credit distributions, and which have a correlation structure that matches CDO market prices. For practical purposes, it is useful that the model is also tractable to implement.
Keywords: Structural credit model, CDO pricing, Levy process.