Current CVA modeling framework has ignored the impact of stochastic recovery rate. Due to the possible negative correlation between default and recovery rate, stochastic recovery rate could have a doubling effect on wrong-way risk. In the case of a payer CDS, when counterparty defaults, the CDS...

Basel II suggests that banks estimate downturn loss given default (DLGD) in capital requirement calculation. There have been studies that focused on the dependence of default rates and loss given defaults through economic cycles. However, the models proposed are still not satisfactory. In this...

Heightened systematic risk in the credit crisis has created challenges to CDO pricing and risk management. One important focus has been on the modeling of stochastic recovery. Different approaches within the Gaussian Copula framework have been proposed, but a consistent model was lacking until...

This paper discusses various ways to add correlated stochastic recovery to the base correlation framework for pricing CDOs. Several recent models are extended to more general framework. The pros and cons of these models for calibration to single name CDS and index CDO tranches are discussed. It...