ABSTRACT
In this chapter we perform an empirical analysis of market prices for CDO tranches, using a data set ranging from December 2004 up to November 2006. The data set consists of three different sets of quotes. Quotes of standard interest rate products are available and these are used to determine risk-free discount factors. For each reference entity entire CDS term structures are available, which are used to determine marginal distributions of the default times. Finally quotes for synthetic CDO tranches are available and these are used to determine the market-implied default dependency structure. Using only the data on synthetic CDO tranche quotes we first investigate whether correlation effects can be discovered from these quotes directly. Therefore the influence of the credit risk of the underlying index is filtered out by means of regression analysis. The resulting residuals should then capture correlation effects.
