Dimension-Reduced Cosine Expansions via Tensor Decomposition: Methodology and Applications to Credit Exposure Quantification

Gijs Mast, Fang Fang, Xiaoyu Shen and Marnix Brands

Papers from arXiv.org

Abstract: This paper initiates a series of studies on a COS-tensor framework, as an efficient alternative to MC for large and liquid portfolios characterized by a modest number of dominant risk factors but a large number of trades. The framework is built on three key insights. First, the cumulative distribution function (CDF) of portfolio level mark-to-market (MtM) values and exposures can be recovered in the Fourier domain by first numerically evaluating their characteristic functions and subsequently applying the one-dimensional COS method. Second, the curse of dimensionality arising in the evaluation of netting-set characteristic functions is mitigated by dimension-reduced cosine expansions derived by combining Fourier-cosine series representations with tensor decomposition techniques. This reformulation shifts the main computational burden from online evaluation to an offline training stage. Third, the offline training can be performed directly in the Fourier domain by reapplying the core idea of the COS method. This improves both training speed and accuracy by more than two orders of magnitude compared with gradient-based training in the physical domain. This paper establishes the core methodology of dimension-reduced cosine expansions, together with the efficient training algorithm, and applies it to netting-set-level MtM and exposure calculations. Among several tensor decomposition techniques, we focus on Canonical Polyadic Decomposition (CPD) for CCR quantification due to its simplicity and transparency, which are particularly appealing in practical risk-management applications. Numerical experiments on netting sets comprising tens of thousands of trades driven by seven risk factors demonstrate that the proposed method achieves relative errors below 0.1% while requiring only a small fraction of the runtime of MC simulation.

Date: 2023-11, Revised 2026-02
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2311.12575 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2311.12575

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().