Calibration of CDO Model by Market Data and LGD Distribution

Abstract:

This paper deals with the calibration of collateralized debt obligation(CDO) model and loss given default(LGD) distribution on the basis of the market data by minimizing the relative entropy.Stochastic recovery and generalized twofactors GaussCopula model are supposed.The computational result,which shows the skewed distribution of the default,can be considered as an modification of classical GaussCopula model.The iteration techniques are adopted to avoid the nonlinearity and nonsmooth of target function.The numerical results prove the stability and convergence of the algorithm.

Key words:collateralized debt obligation; loss given default; calibration; generalized GaussCoupla model