Reading Source: http://www.macs.hw.ac.uk/~cd134/2010/donemb.pdf
Topics Covered in this Reading:
- Introduction
- The roots of the subprime mortgage crisis
- Securitization
- The Gaussian copula model
- A brief introduction to copulas
- Two illustrative copulas
- The Gaussian copula approach to CDO pricing
- Credit default swaps and synthetic CDOs
- The drawbacks of the copula-based model in credit risk
- Inadequate modeling of default clustering
- Inconsistent implied correlation in tranches and an early warning
- Ability to do stress-testing
- The difficulties in valuing CDOs
- Sensitivities of the mezzanine tranche to default correlation
- Squaring the difficulty: CDO-squared
- Alternative approaches to valuing CDOs
- A failure of risk management: AIG
- The AIG story
- Risk management issues
- Summary