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WSC
2007

Estimating tranche spreads by loss process simulation

13 years 6 months ago
Estimating tranche spreads by loss process simulation
A credit derivative is a path dependent contingent claim on the aggregate loss in a portfolio of credit sensitive securities. We estimate the value of a credit derivative by Monte Carlo simulation of the affine point process that models the loss. We consider two algorithms that exploit the direct specification of the loss process in terms of an intensity. One algorithm is based on the simulation of intensity paths. Here discretization introduces bias into the results. The other algorithm facilitates exact simulation of default times and generates an unbiased estimator of the derivative price. We implement the algorithms to value index and tranche swaps, and we calibrate the loss process to quotes on the CDX North America High Yield index.
Kay Giesecke, Baeho Kim
Added 02 Oct 2010
Updated 02 Oct 2010
Type Conference
Year 2007
Where WSC
Authors Kay Giesecke, Baeho Kim
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