Stein’s method and zero bias transformation for CDO tranche pricing

Stein’s method and zero bias transformation for CDO tranche pricing

We propose an original approximation method, which is based on Stein’s method and the zero bias transformation, to calculate CDO tranches in a general factor framework. We establish first-order correction terms for the Gaussian and the Poisson approximations respectively and we estimate the approxim...

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Veröffentlicht in:Finance and stochastics 2009-04, Vol.13 (2), p.151-180
Hauptverfasser: El Karoui, N., Jiao, Y.
Format: Artikel
Sprache:eng
Schlagworte:
Approximation
Bias
Collateralized debt obligations
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Error correction models
Estimation
Finance
Gaussian process
Insurance
Management
Mathematical analysis
Mathematics
Mathematics and Statistics
Normal distribution
Poisson process
Price theory
Pricing
Probability
Probability Theory and Stochastic Processes
Quantitative Finance
Random variables
Statistics for Business
Stein's method
Studies
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Beschreibung
Zusammenfassung:We propose an original approximation method, which is based on Stein’s method and the zero bias transformation, to calculate CDO tranches in a general factor framework. We establish first-order correction terms for the Gaussian and the Poisson approximations respectively and we estimate the approximation errors. The application to the CDO pricing consists of combining the two approximations.
ISSN:0949-2984
1432-1122
DOI:10.1007/s00780-008-0084-6