Dual Quantization for random walks with application to credit derivatives

Details Dual Quantization for random walks with application to credit derivatives Dual Quantization for random walks with application to credit derivatives

2009-10-29

arxiv.org/abs/0910.5655v1

Economy

Quantitative Finance

Computational Finance

22 pages

Scientific paper

We propose a new Quantization algorithm for the approximation of inhomogeneous random walks, which are the key terms for the valuation of CDO-tranches in latent factor models. This approach is based on a dual quantization operator which posses an intrinsic stationarity and therefore automatically leads to a second order error bound for the weak approximation. We illustrate the numerical performance of our methods in case of the approximation of the conditional tranche function of synthetic CDO products and draw comparisons to the approximations achieved by the saddlepoint method and Stein's method.

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