Fast Computation of the Economic Capital, the Value at Risk and the Greeks of a Loan Portfolio in the Gaussian Factor Model
AbstractWe propose a fast algorithm for computing the economic capital, Value at Risk and Greeks in the Gaussian factor model. The algorithm proposed here is much faster than brute force Monte Carlo simulations or Fourier transform based methods. While the algorithm of Hull-White is comparably fast, it assumes that all the loans in the portfolio have equal notionals and recovery rates. This is a very restrictive assumption which is unrealistic for many portfolios encountered in practice. Our algorithm makes no assumptions about the homogeneity of the portfolio. Additionally, it is easier to implement than the algorithm of Hull- White. We use the implicit function theorem to derive analytic expressions for the Greeks
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Bibliographic InfoPaper provided by EconWPA in its series Risk and Insurance with number 0507004.
Length: 9 pages
Date of creation: 23 Jul 2005
Date of revision:
Note: Type of Document - pdf; pages: 9
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Economic capital; gaussian factor model; value at risk; unexpected loss; fast algorithm;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-07-25 (All new papers)
- NEP-CMP-2005-07-25 (Computational Economics)
- NEP-FIN-2005-07-25 (Finance)
- NEP-FMK-2005-07-25 (Financial Markets)
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.:
- Pavel Okunev, 2005. "A Fast Algorithm for Computing Expected Loan Portfolio Tranche Loss in the Gaussian Factor Model," Risk and Insurance 0506002, EconWPA.
- Pavel Okunev, 2005. "A Fast Algorithm for Computing Expected Loan Portfolio Tranche Loss in the Gaussian Factor Model," Papers math/0506125, arXiv.org, revised Jun 2005.
- Pavel Okunev, 2005. "Using Hermite Expansions for Fast and Arbitrarily Accurate Computation of the Expected Loss of a Loan Portfolio Tranche in the Gaussian Factor Model," Finance 0506015, EconWPA.
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