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

Pavel Okunev ()

Finance from EconWPA

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}.

Keywords: Gaussian factor model; Gaussian copula model; loan portfolio; CDO; DJCDX; CDO tranche loss; portfolio tranche loss; expected loss (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2005-06-22
Note: Type of Document - pdf; pages: 8
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0506015

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