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Efficient importance sampling for reduced form models in credit risk

Published: 03 December 2006 Publication History

Abstract

In this paper we study the problem of estimating probability of large losses in the framework of doubly stochastic credit risk models. We derive a logarithmic asymptote for the probability of interest in a specific asymptotic regime and propose an asymptotically optimal importance sampling algorithm for efficiently estimating the same. The numerical results in the last section corroborate our theoretical findings.

References

[1]
Andersen, L., J. Sidenius, and S. Basu. 2003. All your hedges in one basket. Risk 67--72.
[2]
Duffie, D., J. Pan, and K Singleton. 2000. Transform analysis and asset pricing for affine jump diffusions. Econometrica58, 1343--1376.
[3]
Duffie, D., and K. Singleton. 2003. Credit Risk: Pricing, Measurement, and Management, Princeton University Press, Princeton, NJ.
[4]
Glasserman, P., and J. Li. 2005. Importance sampling for portfolio credit risk. Management Science. To appear.
[5]
Li, D. 2001. On default correlation: a copula function approach. Journal of Fixed Income9, 43--54.
[6]
Protter, P. 2004. Stochastic Integration and Differential Equations, 2nd ed., Springer-Verlag, New York, NY.
  1. Efficient importance sampling for reduced form models in credit risk

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      cover image ACM Conferences
      WSC '06: Proceedings of the 38th conference on Winter simulation
      December 2006
      2429 pages
      ISBN:1424405017

      Sponsors

      • IIE: Institute of Industrial Engineers
      • ASA: American Statistical Association
      • IEICE ESS: Institute of Electronics, Information and Communication Engineers, Engineering Sciences Society
      • IEEE-CS\DATC: The IEEE Computer Society
      • SIGSIM: ACM Special Interest Group on Simulation and Modeling
      • NIST: National Institute of Standards and Technology
      • (SCS): The Society for Modeling and Simulation International
      • INFORMS-CS: Institute for Operations Research and the Management Sciences-College on Simulation

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      Winter Simulation Conference

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      Published: 03 December 2006

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      WSC06
      Sponsor:
      • IIE
      • ASA
      • IEICE ESS
      • IEEE-CS\DATC
      • SIGSIM
      • NIST
      • (SCS)
      • INFORMS-CS
      WSC06: Winter Simulation Conference 2006
      December 3 - 6, 2006
      California, Monterey

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      WSC '06 Paper Acceptance Rate 177 of 252 submissions, 70%;
      Overall Acceptance Rate 3,413 of 5,075 submissions, 67%

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