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Using Hermite Expansions for Fast and Arbitrarily Accurate Computation of the Expected Loss of a Loan Portfolio Tranche in the Gaussian Factor Model

Author

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  • Pavel Okunev

    (LBNL & UC Berkeley)

Abstract

We propose a fast algorithm for computing the expected tranche loss in the Gaussian factor model with arbitrary accuracy using Hermite expansions. No assumptions about homogeneity of the portfolio are made. The algorithm is a generalization of the algorithm proposed in \cite{PO}. The advantage of the new algorithm is that it allows us to achieve higher accuracy in almost the same computational time. It is intended as an alternative to the much slower Fourier transform based methods \cite{MD}.

Suggested Citation

  • 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, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:0506015
    Note: Type of Document - pdf; pages: 8
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0506/0506015.pdf
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    References listed on IDEAS

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    1. 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.
    2. Pavel Okunev, 2005. "A Fast Algorithm for Computing Expected Loan Portfolio Tranche Loss in the Gaussian Factor Model," Risk and Insurance 0506002, University Library of Munich, Germany.
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    Cited by:

    1. Puzanova, Natalia & Siddiqui, Sikandar & Trede, Mark, 2009. "Approximate value-at-risk calculation for heterogeneous loan portfolios: Possible enhancements of the Basel II methodology," Journal of Financial Stability, Elsevier, vol. 5(4), pages 374-392, December.
    2. Pavel Okunev, 2005. "Fast Computation of the Economic Capital, the Value at Risk and the Greeks of a Loan Portfolio in the Gaussian Factor Model," Risk and Insurance 0507004, University Library of Munich, Germany.

    More about this item

    Keywords

    Gaussian factor model; Gaussian copula model; loan portfolio; CDO; DJCDX; CDO tranche loss; portfolio tranche loss; expected loss;

    JEL classification:

    • G - Financial Economics

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