Modelling CDO tranches with dependent loss given default

Guido Giese presents an analytic methodology for pricing collateralised debt obligations tranches including stochastic and dependent loss given default

The valuation and simulation of collateralised debt obligations (CDOs) is typically based on similar approaches to those used in credit risk measurement. However, the requirements in terms of accuracy are quite different: risk controllers are interested in an accurate approximation of tail losses, since credit limit systems are typically based on portfolio tail losses at a certain confidence level, whereas methodologies used for the valuation or sensitivity calculation of CDO tranches require an