CDO pricing in VG copula model with stochastic correlations

In this paper, we consider the problem of CDO pricing in Factor Copula Model with Variance Gamma variables as loading factors. We extend the VG copula model to the case with stochastic correlations, which can effectively model “correlation skews” in CDO pricing problem. Probability generating functions of finite portfolio and loss distributions of large homogeneous portfolios are explicitly derived in the 2-state stochastic correlation VG copula model. Numerical methods of calculating the quantities involving in CDO pricing are also proposed.