Andersen, Leif B.G. and Jakob Sidenius, "CDO Pricing with Factor Models: Survey and Comments", Journal of Credit Risk, Vol. 1, No. 3, (Summer 2005), pp. 71-88.

Abstract: Models with systematic factors are popular in the modeling of CDOs, mainly owing to their simplicity and tractability. In this small note we provide a general framework which we use to survey a number of CDO models that have appeared in the literature so far. We suggest extensions and also briefly discuss a select number of issues with factor models, ranging from calibration against CDO market data (ie, base correlation skews) to credit spread hedging and maturity extrapolation. We highlight a number of inherent limitations of factor models and also discuss certain idiosyncracies of popular model-independent approaches to computation of spread hedges.

Keywords: CDOs, CDO models, calibration against CDO market data, nase correlation skews, model-independent approaches.

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