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Quantitative Finance · Glossary

What is Compound correlation?

Definition 15.5 Rates, Credit, XVA and Risk · Chapter 15 — Portfolio Credit

The compound correlation of a tranche is the single correlation at which the one-factor Gaussian copula reprices it, with both its attachment and detachment losses computed at that correlation.

The 3–6% tranche’s model spread against the compound correlation. The curve is humped, so the quote of 195 basis points is matched at two correlations (2.1% and 89.9%), and a quote above the hump by none. Data: the chapter’s tutorial.
Figure 15.2. The 3–6% tranche’s model spread against the compound correlation. The curve is humped, so the quote of 195 basis points is matched at two correlations (2.1% and 89.9%), and a quote above the hump by none. Data: the chapter’s tutorial.
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