Abstract
In this paper, we present the Geometrical Loss Model. The GLM will allow for a tractable approach for CDO pricing and risk management. We introduce the concept of Base Volatility. We stress-test the model on the market data over the period 2005-2008, wich include the correlation crisis in 2005 and the recent credit crunch as well as the boom period of structured credit product in 2005 and 2006. The base volatilities increase during the boom period and decrease during the recessions. With GLM we resolved as well the issues of negative deltas and zero price of the tranche [60%, 100%]. We give numerical examples in which we show a perfect match to market data, for CDX.
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