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Efficient simulation for risk measurement in portfolio of CDOS

Published: 03 December 2006 Publication History

Abstract

We consider a portfolio containing CDO tranches as well as ordinary bonds. Our interest is in large loss probabilities and risk measures such as value-at-risk. When loss is measured on a mark-to-market basis, estimation via simulation requires a nested procedure: In the outer step one draws realizations of all risk factors up to the horizon, and in the inner step one re-prices each instrument in the portfolio at the horizon conditional on the drawn risk factors. Practitioners perceive the computational burden of such nested schemes to be unacceptable, and adopt a variety of somewhat ad hoc measures to avoid the inner simulation. In this paper, we question whether such short cuts are necessary. We show that a relatively small number of trials in the inner step can yield accurate estimates, and analyze how a fixed computational budget may be allocated to the inner and the outer step to minimize the mean square error of the resultant estimator.

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Cited By

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  • (2010)An efficient simulation procedure for point estimation of expected shortfallProceedings of the Winter Simulation Conference10.5555/2433508.2433858(2821-2831)Online publication date: 5-Dec-2010
  • (2009)Estimating the mean of a non-linear function of conditional expectationWinter Simulation Conference10.5555/1995456.1995626(1223-1236)Online publication date: 13-Dec-2009
  1. Efficient simulation for risk measurement in portfolio of CDOS

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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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    View all
    • (2010)An efficient simulation procedure for point estimation of expected shortfallProceedings of the Winter Simulation Conference10.5555/2433508.2433858(2821-2831)Online publication date: 5-Dec-2010
    • (2009)Estimating the mean of a non-linear function of conditional expectationWinter Simulation Conference10.5555/1995456.1995626(1223-1236)Online publication date: 13-Dec-2009

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