Analytic Results And Weighted Monte Carlo Simulations For CDO Pricing

The authors explore the possibilities of importance sampling in the Monte Carlo pricing of a structured credit derivative referred to as Collateralized Debt Obligation (CDO). Modeling a CDO contract is challenging, since it depends on a pool of (typically 100) assets, Monte Carlo simulations are often the only feasible approach to pricing. Variance reduction techniques are therefore of great importance. This paper presents an exact analytic solution using Laplace-transform and MC importance sampling results for an easily tractable intensity-based model of the CDO, namely the compound Poissonian.

Provided by: Budapest University of Technology and Economics Topic: Big Data Date Added: May 2011 Format: PDF

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