Stochastic Local Intensity Loss Models with Interacting Particle Systems
AbstractIt is well-known from the work of Sch\"onbucher (2005) that the marginal laws of a loss process can be matched by a unit increasing time inhomogeneous Markov process, whose deterministic jump intensity is called local intensity. The Stochastic Local Intensity (SLI) models such as the one proposed by Arnsdorf and Halperin (2008) allow to get a stochastic jump intensity while keeping the same marginal laws. These models involve a non-linear SDE with jumps. The first contribution of this paper is to prove the existence and uniqueness of such processes. This is made by means of an interacting particle system, whose convergence rate towards the non-linear SDE is analyzed. Second, this approach provides a powerful way to compute pathwise expectations with the SLI model: we show that the computational cost is roughly the same as a crude Monte-Carlo algorithm for standard SDEs.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1302.2009.
Date of creation: Feb 2013
Date of revision:
Publication status: Published in Mathematical Finance 00, 00 (2013) 1-29
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-16 (All new papers)
- NEP-CMP-2013-02-16 (Computational Economics)
- NEP-ORE-2013-02-16 (Operations Research)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carol Alexander & Leonardo Nogueira, 2004. "Stochastic Local Volatility," ICMA Centre Discussion Papers in Finance icma-dp2008-02, Henley Business School, Reading University, revised Mar 2008.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If references are entirely missing, you can add them using this form.