New answers tagged spread
The intuition behind the statement "if correlation increases, the spread of a CDO junior tranche decreases" is as follows: If correlation increases, more probability mass of the default distribution is moving to the tails. The risk of joint default increases, but at the same time the chance of joint survivals increases. So the higher correlation, the ...
for synthetic cdo you could have a look at this paper - http://home.gwu.edu/~sagca/JAI.pdf. as for equity tranche, i understand that it receives residual cashflow i.e. remainings after paying all senior tranches.
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