The idea behind this paper to show that indeed tranche correlation depends on time horizon and asset correlation of the underlying portfolio. This means that Basel II Risk Weighted Assets will go up. In order to support the securitization activity with lower cost of capital one would need the Dynamic Credit Portfolio Management (in case of problem for the Dynamica CPM paper please click here) approache described in this web site. If you have a problem in downloading please click here.
When pricing or managing a credit portfolio one would normally compaire a piece of the capital structure of the bespoke portfolio to an "equivalente" piece of the capital structure of an appropriate standardised credit index portfolio. This is equivalent to a discovery pricing process for the bespoke "tranche". When using the standard one-factor model an important input is the correlation. Pricing a bespoke tranche within the one-factor model means "mapping" the loss distribution of the bespoke tranch into the loss distribution of standardised credit index, and this process is called "correlation mapping". In this paper we show several alternative techniques largely used by market participants to do it. We remind the reader however that pricing is ultimately a very subjective process and the more experience one has on the asset class the better positioned one is to exercise "sanity" checks in any pricing algorithm. In case you have a problem in downloading the file please click here.