Poisson approximation for the expectation of call function with application in collateralized debt obligation

N. Yonghint and K. Neammanee

Communications in Statistics - Theory and Methods, 2024, vol. 53, issue 14, 5265-5279

Abstract: Let W be a sum of Bernoulli random variables which satisfies local dependence and hz be a call function. This function has many applications in finance. In this article, we give bounds of Poisson approximation for E[hz(W)] by using Stein-Chen’s method. Our results improve the previous results. Finally, we apply these results to approximate the mean of percentage loss for each tranche in the collateralized debt obligation (CDO) tranche pricing.

Date: 2024
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DOI: 10.1080/03610926.2023.2215359

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