Dual Quantization for random walks with application to credit derivatives

Abstract : We propose a new Quantization algorithm for the approximation of inhomogeneous random walks, which are the key terms for the valuation of CDO-tranches in latent factor models. This approach is based on a dual quantization operator which posses an intrinsic stationarity and therefore automatically leads to a second order error bound for the weak approximation. We illustrate the numerical performance of our methods in case of the approximation of the conditional tranche function of synthetic CDO products and draw comparisons to the approximations achieved by the saddlepoint method and Stein's method.
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Journal articles
Journal of Computational Finance, Incisive media Ltd, 2012, 16 (2), pp.33-60 ;
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Submitted on : Thursday, October 29, 2009 - 2:12:47 PM
Last modification on : Tuesday, October 11, 2016 - 2:05:01 PM
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  • HAL Id : hal-00428523, version 1
  • ARXIV : 0910.5655

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Gilles Pagès, Benedikt Wilbertz. Dual Quantization for random walks with application to credit derivatives. Journal of Computational Finance, Incisive media Ltd, 2012, 16 (2), pp.33-60 ;. <hal-00428523>

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