Kamakura Corporation reported today that it has released version 2.0 of its Kamakura Risk Information Services KRIS-CDO web-based collateralized debt valuation tool.
In addition Kamakura is making available a new research report "Implications of Alternative CDO and Credit Portfolio Modeling Techniques" to be presented by Kamakura founder Dr. Donald R. van Deventer at the University of Chicago on October 19. KRIS-CDO, officially launched April 2007, allows users of the KRIS default probability service to seamlessly analyze synthetic CDOs under a wide range of valuation techniques. Using KRIS-CDO, users can set up and initiate a valuation run on a portfolio of synthetic CDO tranches in a matter of minutes. Valuations run on a series of servers, including an 8-processor IBM blade server, based on a secure facility shared with the U.S. Department of Defense and several major multinational corporations.
"The credit crisis of August and September has shown how critical it is to have a valuation capability that is independent of the major rating agencies and Wall Street firms," said Warren Sherman, Kamakura President and Chief Operating Officer. "This is especially true when market liquidity shrinks. We've been gratified by advice of many leading market participants that has led both to the enhancements in KRIS-CDO version 2.0 and the insights in Dr. van Deventer's paper. We believe greater transparency in CDO analytics is essential to best practice corporate governance and risk management."
Dr. van Deventer's paper will be presented at the Credit Risk Conference sponsored by the Stevanovich Center for Financial Mathematics at the University of Chicago. In his paper, Dr. van Deventer compares a number of CDO valuation techniques using the KRIS-CDO service: a base case using short term default probabilities with no correlation, a second case with long term default probabilities, a third case where default probabilities are sampled from history, 20 multiperiod valuations using the copula approach with correlations from 0 to 1.00, and then a series of 10 million scenario valuations using macro-factor driven default probabilities that separate default risk between systematic and idiosyncratic components. The study shows that copula-based approaches lead to much more optimistic valuations of CDO tranches than a macro-factor driven approach, and the valuation differences are substantial. The study also shows that a scenario count in the millions is necessary for "reasonable" accuracy compared to the level of bid-offered spreads.
The upgrade to KRIS-CDO version 2.0 includes an unlimited number of scenarios with a series of default choices from 100 to 500,000 scenarios per run. KRIS-CDO version 2.0 displays concentrations by industry and rating, and it allows notional principal to vary among the reference names in the portfolio. KRIS-CDO makes complete use of the full term structure of default probabilities from the KRIS default probability service. The term structure of default is derived from 60 different default probability formulas, depending on the time horizon being analyzed. KRIS-CDO now allows user defined default probabilities to be used as inputs as well as the default probabilities in the KRIS default probability service. Finally, version 2.0 of KRIS-CDO displays the simulated values for macro-economic variables and the resulting default probabilities underlying the macro-factor driven simulation.
Kamakura is offering free trials of its KRIS default probability, default correlation, and collateralized debt obligation pricing service to qualified institutions.