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Particle Methods For The Estimation Of Credit Portfolio Loss Distributions

Author

Listed:
  • RENÉ CARMONA

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

  • STÉPHANE CRÉPEY

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

Abstract

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.

Suggested Citation

  • René Carmona & Stéphane Crépey, 2010. "Particle Methods For The Estimation Of Credit Portfolio Loss Distributions," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(04), pages 577-602.
    • Handle: RePEc:wsi:ijtafx:v:13:y:2010:i:04:n:s0219024910005905
    DOI: 10.1142/S0219024910005905
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    Citations

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    Cited by:

    1. Guangwu Liu, 2015. "Simulating Risk Contributions of Credit Portfolios," Operations Research, INFORMS, vol. 63(1), pages 104-121, February.
    2. Lokman A Abbas-Turki & Stéphane Crépey & Bouazza Saadeddine, 2023. "Pathwise CVA Regressions With Oversimulated Defaults," Post-Print hal-03910149, HAL.
    3. Xiaowei Zhang & Jose Blanchet & Kay Giesecke & Peter W. Glynn, 2015. "Affine Point Processes: Approximation and Efficient Simulation," Mathematics of Operations Research, INFORMS, vol. 40(4), pages 797-819, October.
    4. Lokman A. Abbas‐Turki & Stéphane Crépey & Bouazza Saadeddine, 2023. "Pathwise CVA regressions with oversimulated defaults," Mathematical Finance, Wiley Blackwell, vol. 33(2), pages 274-307, April.
    5. Lokman Abbas-Turki & St'ephane Cr'epey & Bouazza Saadeddine, 2022. "Pathwise CVA Regressions With Oversimulated Defaults," Papers 2211.17005, arXiv.org.

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