The recent volatility in the credit markets has made CDO base correlation calibration difficult for some parts of the capital structure. For example, the 15-30% tranche on the Investment Grade CDX index has occasionally traded at levels which will not calibrate using common CDO pricing techniques.
"Our clients have been keen to see a reasonable solution for base correlation calibration for this market environment," says Rohan Douglas, CEO and Founder of Quantifi, Inc. "We have been working closely with select clients to implement a number of techniques which guarantee robust and fast calibration in a way that is consistent with current market best practice and do not rely on arbitrarily adjusting model assumptions such as recovery rates."
Enabling standard CDO Copula models to calibrate across a wide range of market environments, the new models include:
- Top down or inverted calibration techniques
- Extended factors which greatly expand the range of market quotes that can be calibrated
- Numerical techniques that greatly speed up and stabilize calibration at high correlations
Quantifi's enhanced base correlation calibration is available in the latest release of Quantifi XL.