research-article

Approximations and control variates for pricing portfolio credit derivatives

Authors:

Zhiyong Chen,

Paul GlassermanAuthors Info & Claims

WSC '07: Proceedings of the 39th conference on Winter simulation: 40 years! The best is yet to come

Pages 976 - 983

Published: 09 December 2007 Publication History

Get Access

Abstract

Portfolio credit derivatives that depend on default correlation are increasingly widespread in the credit market. Valuing such products often entails Monte Carlo simulation. However, for large portfolios, plain Monte Carlo simulation can be slow. In this paper, we develop approximation methods for pricing collateralized debt obligation (CDO) tranches in the widely used factor copula approach. We also discuss using the approximations as control variates to improve the precision of Monte Carlo estimates. These approximation methods and control variate techniques could be applied to pricing other portfolio credit derivatives as well.

References

[1]

Andersen, L., J. Sidenius, and S. Basu. 2003. All your hedges in one basket. Risk 16:67--72.

Google Scholar

[2]

Bruyere, R., R. Cont, R. Copinot, L. Fery, C. Jaecl, T. Spitz, and G. Smart. 2006. Credit Derivatives and Structured Credit: A Guide for Investors. Chichester, England: Wiley.

Google Scholar

[3]

Chen, Z., and P. Glasserman. 2006. Fast pricing of basket default swaps. To appear in Operations Research.

Digital Library

Google Scholar

[4]

Duffie, D., and K. Singleton. 2003. Credit Risk: Pricing, Measurement, and Management. Princeton, New Jersey: Princeton University Press.

Google Scholar

[5]

Gupton, G., C. Finger, and M. Bhatia. 1997. Creditmetrics Technical Document. Technical report, J. P. Morgan & Co., New York.

Google Scholar

[6]

Hull, J., and A. White. 2004. Valuation of a CDO and an nth to default CDS without Monte Carlo simulation. Journal of Derivatives 12, 2.

Crossref

Google Scholar

[7]

Li, D. 2000. On default correlation: A copula function approach. Journal of Fixed Income 9:43--54.

Crossref

Google Scholar

[8]

Schönbucher, P. 2003. Credit Derivatives Pricing Models: Model, Pricing and Implementation. Princeton, New Jersey: Princeton University Press.

Google Scholar

Recommendations

Dynamic Hedging of Portfolio Credit Derivatives

We compare the performance of various hedging strategies for index collateralized debt obligation (CDO) tranches across a variety of models and hedging methods during the recent credit crisis. Our empirical analysis shows evidence for market ...
Time-Changed Birth Processes and Multiname Credit Derivatives

A credit investor such as a bank granting loans to firms or an asset manager buying corporate bonds is exposed to correlated corporate default risk. A multiname credit derivative is a financial security that allows the investor to transfer this risk to ...
Deriving the dependence structure of portfolio credit derivatives using evolutionary algorithms
ICCS'06: Proceedings of the 6th international conference on Computational Science - Volume Part IV

The correct modeling of default dependence is essential for the valuation of portfolio credit derivatives. However, for the pricing of synthetic CDOs a one-factor Gaussian copula model with constant and equal pairwise correlations for all assets in the ...

Comments

Please enable JavaScript to view thecomments powered by Disqus.

Information & Contributors

Information

Published In

WSC '07: Proceedings of the 39th conference on Winter simulation: 40 years! The best is yet to come

December 2007

2659 pages

ISBN:1424413060

General Chair:
Jeff Tew

Publisher

IEEE Press

Publication History

Published: 09 December 2007

Check for updates

Qualifiers

Research-article

Conference

WSC07

Sponsor:

IIE
INFORMS-SIM
ASA
IEEE/SMC
SIGSIM
NIST
(SCS)

WSC07: Winter Simulation Conference

December 9 - 12, 2007

Washington D.C.

Acceptance Rates

WSC '07 Paper Acceptance Rate 152 of 244 submissions, 62%;

Overall Acceptance Rate 3,413 of 5,075 submissions, 67%

Other Metrics

View Article Metrics

Bibliometrics & Citations

Bibliometrics

Article Metrics

0
Total Citations
84
Total Downloads

Downloads (Last 12 months)2
Downloads (Last 6 weeks)0

Reflects downloads up to 24 Nov 2024

Other Metrics

View Author Metrics

Citations

View Options

Login options

Check if you have access through your login credentials or your institution to get full access on this article.

Recommendations

Dynamic Hedging of Portfolio Credit Derivatives

Time-Changed Birth Processes and Multiname Credit Derivatives

Deriving the dependence structure of portfolio credit derivatives using evolutionary algorithms