The price of default correlation
The development of basket credit products such as single-tranche CDOs and first-to-default baskets has produced a market in default correlation. However there is little consensus on exactly how default correlation should be measured or 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
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