4
$\begingroup$

I'm having a hard time getting my expected loss calculations to tie out with the standard recursion method when implementing the proxy distribution algorithm described by the Back To Normal CDO paper by Shelton.

Anyone have working code examples for this?

$\endgroup$
  • 1
    $\begingroup$ Can you add some more specifics, please? Info that would be helpful: language, reference, and your code. And how/why are your calcs wrong? As it is, this a pretty daunting problem. $\endgroup$ – Richard Herron Mar 16 '11 at 3:07
1
$\begingroup$

Proxy integration is just an approximation which can deviate pretty strongly from the recursion algorithm for thin tranches or extremely large/small loss variances. Proceed with caution.

Also: when you integrate the Gaussian proxy, do you start from $-\infty$ or from 0? Counter-intuitively, you should start from $-\infty$ to get the correct portfolio expected loss.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy