The Implied Loss Surface of Cdos

Krekel, Martin; Partenheimer, Jan

doi:10.2139/ssrn.950376

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The Implied Loss Surface of Cdos

22 Pages Posted: 8 Dec 2006

See all articles by Martin Krekel

Jan Partenheimer

Ulm University

Date Written: December 2006

Abstract

This document describes how to determine the implied loss distribution of a credit portfolio from CDO tranche quotes. Our loss surface is consistently calibrated to market quotes for all tranches and maturities. It can be applied for the pricing of (bespoke) CDO tranches and nth-to-Default swaps or it can be serve as an initial distribution for dynamic loss models. The calibration is done numerically by solving a nonlinear optimization problem with Sequential Quadratic Programming method.

Keywords: CDO Pricing, NTD Pricing, Credit Portfolio, Implied Loss Distribution, Sequential Quadratic Programming

JEL Classification: G13

Suggested Citation: Suggested Citation

Krekel, Martin and Partenheimer, Jan, The Implied Loss Surface of Cdos (December 2006). Available at SSRN: https://ssrn.com/abstract=950376 or http://dx.doi.org/10.2139/ssrn.950376