Analytic results and weighted Monte Carlo simulations for CDO pricing

Details Analytic results and weighted Monte Carlo simulations for CDO pricing Analytic results and weighted Monte Carlo simulations for CDO pricing

2011-05-26

arxiv.org/abs/1105.5416v1

Economy

Quantitative Finance

Computational Finance

12 pages, 9 figures

Scientific paper

We explore the possibilities of importance sampling in the Monte Carlo pricing of a structured credit derivative referred to as Collateralized Debt Obligation (CDO). Modeling a CDO contract is challenging, since it depends on a pool of (typically about 100) assets, Monte Carlo simulations are often the only feasible approach to pricing. Variance reduction techniques are therefore of great importance. This paper presents an exact analytic solution using Laplace-transform and MC importance sampling results for an easily tractable intensity-based model of the CDO, namely the compound Poissonian. Furthermore analytic formulae are derived for the reweighting efficiency. The computational gain is appealing, nevertheless, even in this basic scheme, a phase transition can be found, rendering some parameter regimes out of reach. A model-independent transform approach is also presented for CDO pricing.

Affiliated with

Also associated with

No associations

Rating

Analytic results and weighted Monte Carlo simulations for CDO pricing does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with Analytic results and weighted Monte Carlo simulations for CDO pricing, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Analytic results and weighted Monte Carlo simulations for CDO pricing will most certainly appreciate the feedback.

Rate now

Comments { 0 }

Profile ID: LFWR-SCP-O-664071