Lévy Base Correlation Explained

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Lévy Base Correlation Explained

by João Garcia of Dexia Group, and
Serge Goossens of Dexia Bank

August 12, 2007

Abstract: In an earlier paper we introduced Lévy base correlation. In this paper we compare the Gaussian copula and Lévy base correlation models. The results of a historical study of both models on the iTraxx Europe Main dataset are presented. We focus on the base correlation surface and on the deltas of the tranches with respect to the index.

JEL Classification: C60.

Keywords: Base Correlation, CDO, Lévy Process, Historical Tests, Synthetic CDO Deltas.

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