Approximating Independent Loss Distributions with an Adjusted Binomial Distribution

We describe an approximation method, based on binomial distribution adjustments, for constructing independent loss distributions.

Author(s) :

Dominic Okane

KaneAffiliated Professor, EDHEC Business School

Presentation :

This method can handle both homogeneous and heterogeneous loss portfolios. We find that this simple algorithm provides an excellent fit to the exact distribution for a broad range of correlations and portfolio credit quality. For typical correlations, and homogeneous loss portfolios, the percentage error in the spread is typically 0.04% and usually less. It is at least 30 times faster than a full homogeneous loss recursion, and significantly faster for inhomogeneous loss portfolios.
Pdf
Approximating Independent Loss Distributions with an Adjusted Binomial Distribut...
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Type : Working paper
Date : le 12/12/2007
Extra information : Pour plus d'informations, nous vous prions de vous adresser à Joanne Finlay, Direction de la recherche de l'EDHEC [ joanne.finlay@edhec.edu] Les opinions exprimées sont celles de l'auteur et n'engagent pas la responsabilité de l'EDHEC.
Research Cluster : Finance

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