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Particle Methods For The Estimation Of Credit Portfolio Loss Distributions



    (Bendheim Center for Finance, ORFE, Princeton University, Princeton, NJ 08544, USA)


    (Département de Mathématiques, Université d'Évry Val d'Essonne, 91025 Évry Cedex, France)

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    The goal of the paper is the numerical analysis of the performance of Monte Carlo simulation based methods for the computation of credit-portfolio loss-distributions in the context of Markovian intensity models of credit risk. We concentrate on two of the most frequently touted methods of variance reduction in the case of stochastic processes: importance sampling (IS) and interacting particle systems (IPS) based algorithms. Because the subtle differences between these methods are often misunderstood, as IPS is often regarded as a mere particular case of IP, we describe in detail the two kinds of algorithms, and we highlight their fundamental differences. We then proceed to a detailed comparative case study based on benchmark numerical experiments chosen for their popularity in the quantitative finance circles.

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    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

    Volume (Year): 13 (2010)
    Issue (Month): 04 ()
    Pages: 577-602

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    Handle: RePEc:wsi:ijtafx:v:13:y:2010:i:04:p:577-602
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