Coarse-grained CDOs
While analytical models of credit portfolio risk using conditional independence have been one of the most promising areas of recent research, they often involve granularity assumptions that are violated in CDO reference portfolios. Here, Michael Pykhtin and Ashish Dev lift the usual fine-grained portfolio restriction to calculate CDO loss distributions for coarse-grained reference portfolios. Interestingly, they show that senior tranches are particularly sensitive to the level of granularity
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