Fast Computation of the Economic Capital, the Value at Risk and the Greeks of a Loan Portfolio in the Gaussian Factor Model
We 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
References listed on IDEAS
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. "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.
- 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. "A Fast Algorithm for Computing Expected Loan Portfolio Tranche Loss in the Gaussian Factor Model," Risk and Insurance 0506002, EconWPA.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpri:0507004. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.