Calibration of CDO tranches with the dynamical GPL model

Consistent calibration of a credit index and its tranches across maturities with a single arbitrage-free model is a difficult problem. Here, Damiano Brigo, Andrea Pallavicini and Roberto Torresetti show that a simple loss dynamics based on the generalised Poisson process achieves good results. This model allows for generalisations, achieving stochastic spread dynamics and consistency with single names

We consider a dynamical model for the loss distribution of a pool of names. Our model focuses on three points: tractability – the loss distribution should be known analytically; the calibration of market information, currently quoted index collateralised debt obligation (CDO) tranches and tranchelets for several maturities should be possible, and realistic numerical examples should be given; and the pricing of correlation products depending on the loss distribution dynamics should be feasible in