In the third of its release of CDO valuation models, Dresdner Kleinwort researchers have published what they describe as the first of these models that can be used to restructure a real-life CDO. Unlike the large homogenous pool and finite homogenous pool models it published earlier, the recursive model is able to assume that the credits in the portfolio each have different spreads, notional exposures and recovery rates.

However, a drawback of the model is that the number of portfolio losses can increase exponentially with the number of assets. The workaround is to 'discretise' the loss distribution into different loss buckets, the analysts explain.

The model is available to download on Dresdner's research portal.