Implied Loss Distribution, Term Structure of Correlation Skew and ...
Implied Loss Distribution, Term Structure of Correlation Skew and ...
Implied Loss Distribution, Term Structure of Correlation Skew and ...
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<strong>Implied</strong> <strong>Loss</strong> <strong>Distribution</strong><br />
An equity tranche with tranche size K can be valued as follows:<br />
E<br />
( L ( K ) )<br />
T<br />
( L ( K ) )<br />
∂ E<br />
T<br />
∂ K<br />
2<br />
∂ E<br />
∂ K<br />
( L ( K ) )<br />
T<br />
2<br />
K<br />
= ∫<br />
0<br />
=<br />
S<br />
S<br />
L<br />
L<br />
= −<br />
P<br />
P<br />
( x ) dx<br />
( K ) = Pr<br />
f<br />
L<br />
P<br />
( K )<br />
[ L > K ]<br />
P<br />
Using market index tranche spreads <strong>and</strong> base correlation we<br />
can obtain the implied loss distribution <strong>of</strong> CDS index portfolio.<br />
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