Correlation conflict
The recent emergence of a tranched CDO market has pushed the concept of correlation between credit defaults to the forefront of market debate. However, as Simon Boughey reports, there is little consensus about whether this correlation can be accurately priced
The idea of trading how closely the prices of different shares are correlated is well established. But in recent years there has been a push by banks and some hedge funds to create a similar market for credit based on the correlation between defaults.
The development has been made possible by the introduction of various structured credit products. One such product is the single-tranche collateralised debt obligation (CDO), where only one tranche of a CDO is created in the credit default swap (CDS
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