Default correlation is central to the assessment, pricing and management of credit risk at the portfolio level. However, default dependence is also the most difficult calibration issue in credit risk modelling. In this presentation, we will consider how default dependence can be integrated into the asset-based and spread-based modelling approaches introduced in the previous two workshops, and discuss their advantages, disadvantages and possible methods of calibration to market data. We will conclude with some remarks on how synthetic CDO tranches are essentially correlation products, the quoted prices for which reflect a "correlation smile" akin to the implied volatility smile found in options markets.

Presentation

• Ekik Schlogl: Credit Derivative Pricing Models 3 - Default Correlation Models

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