Quantifi, a provider of analytics and risk management solutions to the global credit markets, has extended the functionality of its credit derivative valuation software to include a new correlated recovery model, which it says will incorporate a more realistic treatment of recovery in the event of default.
Quantifi reckons that institutions need to alter their pricing and risk modelling in order to take into account recent market turmoil. Its extension to a new model for pricing CDOs is a reaction to this market need, it claims.
According to the vendor, this new model will allow calibration to a wider range of tranche prices than the traditional one-factor Gaussian copula model. The new model has been dubbed the Quantifi Correlated Recovery model (QCR) and it allows participants to calibrate and price even during periods of extreme market turmoil, says Quantifi.
It claims that the QCR model, which is available in version 9.1 of Quantifi Risk, Quantifi Toolkit, and Quantifi XL, also more accurately prices senior tranches while providing improved sensitivities including solving the ‘negative delta’ problem.
Rohan Douglas, founder and CEO of Quantifi, explains: “The correlated recovery model is a new class of CDO model which has generated a lot of interest from banks and other leading market participants.”