(Preface) Credit Correlation: Life after Copulas

CREDIT CORRELATION: LIFE AFTER COPULAS, Alexander Lipton, Andrew Ronnie, eds., World Scientific Publishing Co., 2007

International Journal of Theoretical and Applied Finance, Vol. 10, No. 4, 2007

1 Pages Posted: 7 Oct 2009

See all articles by Alexander Lipton

Alexander Lipton

affiliation not provided to SSRN

Andrew Rennie

Merrill Lynch & Co. - Merrill Lynch, UK

Date Written: December 28, 2007

Abstract

The recent growth of credit derivatives has been explosive. The global credit derivatives market grew in notional value from $1 trillion to $20 trillion from 2000 to 2006. However, understanding the true nature of these instruments still poses both theoretical and practical challenges. For a long time now, the framework of Gaussian copulas parameterized by correlation, and more recently base correlation, has provided an adequate, if unintuitive, description of the market. However, the increased liquidity in credit indices and index tranches, as well as the proliferation of exotic instruments such as forward starting tranches, options on tranches, leveraged super senior tranches, and the like, have made it imperative to come up with models that describe market reality better. This book, originally and concurrently published in the International Journal of Theoretical and Applied Finance, Vol. 10, No. 4, 2007, agrees that base correlation has outlived its usefulness; opinions of how to replace it, however, are divided. Both the top-down and bottom-up approaches for describing the dynamics of credit baskets are presented, and pro and contra arguments are put forward. Readers will decide which direction is the most promising one at the moment. However, it is hoped that, in the near future, models that transcend base correlation will be proposed and accepted by the market.

Keywords: credit derivatives, Gaussian copulas, tranches, credit baskets, base correlations

Suggested Citation

Lipton, Alexander and Rennie, Andrew, (Preface) Credit Correlation: Life after Copulas (December 28, 2007). CREDIT CORRELATION: LIFE AFTER COPULAS, Alexander Lipton, Andrew Ronnie, eds., World Scientific Publishing Co., 2007, International Journal of Theoretical and Applied Finance, Vol. 10, No. 4, 2007, Available at SSRN: https://ssrn.com/abstract=1478374

Alexander Lipton (Contact Author)

affiliation not provided to SSRN ( email )

Andrew Rennie

Merrill Lynch & Co. - Merrill Lynch, UK ( email )

Merrill Lynch Financial Centre
2 King Edward Street
LONDON, EC1A 1HQ
United Kingdom

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