Correlation Mapping Under Levy and Gaussian Base Correlation

Abstract

In an earlier paper we treated the concept of Base Expected Loss (BEL) (both for the Gaussian Copula and Levy Base Correlation models) as an arbitrage free approach to interpolate the base correlation curves for pricing non-standard tranches of the standardized credit indices. In this paper we extend the approach further by using the technique to price CDO's of non-standardized portfolios (so called bespoke CDO's). That is the framework is developed in the context of correlation mapping. Additionally we compare the correlation mapping methodology developed here with alternative approaches largely used with practitioners.