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Importance Sampling Enhanced with the COS Method for the Portfolio Risk Allocation

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  • Fang Fang
  • Xiaoyu Shen
  • Qinling Wang

Abstract

We introduce ISCOS, a cross-entropy importance-sampling calibration method for rare credit-portfolio losses. We derive Gaussian and Gaussian--inverse-Gamma proposals and analyse the propagation of finite-COS approximation errors to the fitted parameters. Numerical experiments for Gaussian and Student t-copula credit portfolios show the efficiency of this method.

Suggested Citation

  • Fang Fang & Xiaoyu Shen & Qinling Wang, 2026. "Importance Sampling Enhanced with the COS Method for the Portfolio Risk Allocation," Papers 2608.30749, arXiv.org.
    • Handle: RePEc:arx:papers:2608.30749
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    References listed on IDEAS

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    1. Michael Kalkbrener, 2005. "An Axiomatic Approach To Capital Allocation," Mathematical Finance, Wiley Blackwell, vol. 15(3), pages 425-437, July.
    2. Fang, Fang & Oosterlee, Kees, 2008. "A Novel Pricing Method For European Options Based On Fourier-Cosine Series Expansions," MPRA Paper 9319, University Library of Munich, Germany.
    3. Paul Glasserman & Jingyi Li, 2005. "Importance Sampling for Portfolio Credit Risk," Management Science, INFORMS, vol. 51(11), pages 1643-1656, November.
    4. Pieter-Tjerk de Boer & Dirk Kroese & Shie Mannor & Reuven Rubinstein, 2005. "A Tutorial on the Cross-Entropy Method," Annals of Operations Research, Springer, vol. 134(1), pages 19-67, February.
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