Increasing the number of inner replications of multifactor portfolio credit risk simulation in the t-copula model
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Halis Sak
Abstract
We consider the problem of simulating tail loss probabilities and expected losses conditioned on exceeding a large threshold (expected shortfall) for credit portfolios. Instead of the commonly used normal copula framework for the dependence structure between obligors, we use the t-copula model. We increase the number of inner replications using the so-called geometric shortcut idea to increase the efficiency of the simulations. The paper contains all details for simulating the risk of the t-copula credit risk model by combining outer importance sampling (IS) with the geometric shortcut. Numerical results show that the applied method is efficient in assessing tail loss probabilities and expected shortfalls for credit risk portfolios. We also compare the tail loss probabilities and expected shortfalls under the normal and t-copula model.
© de Gruyter 2010
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Articles in the same Issue
- Editiorial
- Random packing of hyperspheres and Marsaglia's parking lot test
- Diffusion in a nonhomogeneous medium: quasi-random walk on a lattice
- Improved Halton sequences and discrepancy bounds
- Generalizing Sudoku to three dimensions
- Adaptive integration and approximation over hyper-rectangular regions with applications to basket option pricing
- Exact simulation of Bessel diffusions
- A good permutation for one-dimensional diaphony
- Error bounds for computing the expectation by Markov chain Monte Carlo
- Stochastic iterative projection methods for large linear systems
- Increasing the number of inner replications of multifactor portfolio credit risk simulation in the t-copula model
- A genetic algorithm approach to estimate lower bounds of the star discrepancy
- Random and deterministic fragmentation models
- MCMC imputation in autologistic model
