Multilevel simulation of functionals of Bernoulli random variables with application to basket credit derivatives

DOI10.1007/S11009-013-9380-5MaRDI QIDQ496948zbMATH OpenOpenAlexFDO

Authors K. Bujok, Ben M. Hambly, C. Reisinger

Publication date 23 September 2015

Published in Methodology and Computing in Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1211.0707

zbMATH Keywords

exchangeabilitylarge deviations principlebasket credit derivativesmultilevel Monte Carlo simulation

Mathematics Subject Classification ID

Monte Carlo methods (65C05) Large deviations (60F10) Numerical methods (including Monte Carlo methods) (91G60) Credit risk (91G40)

Abstract: We consider $N$ Bernoulli random variables, which are independent conditional on a common random factor determining their probability distribution. We show that certain expected functionals of the proportion $L_N$ of variables in a given state converge at rate $1/N$ as $Nightarrowinfty$. Based on these results, we propose a multi-level simulation algorithm using a family of sequences with increasing length, to obtain estimators for these expected functionals with a mean-square error of $epsilo{n}^2$ and computational complexity of order $epsilo{n}^{-2}$, independent of $N$. In particular, this optimal complexity order also holds for the infinite-dimensional limit. Numerical examples are presented for tranche spreads of basket credit derivatives.

Recommendations

• Finding expectations of monotone functions of binary random variables by simulation, with applications to reliability, finance, and round robin tournaments
• Efficient simulation of tail probabilities of sums of dependent random variables
• A new simulation estimator of system reliability
• Fast Simulation of Multifactor Portfolio Credit Risk
• Computational and analytical bounds for multivariate Bernoulli distributions

Cites work

• scientific article; zbMATH DE number 410740 (Why is no real title available?)
• LARGE DEVIATIONS IN MULTIFACTOR PORTFOLIO CREDIT RISK
• Large portfolio asymptotics for loss from default
• Large portfolio losses
• Multilevel Monte Carlo Path Simulation
• Multilevel dual approach for pricing American style derivatives
• Probabilistic Symmetries and Invariance Principles
• Stochastic evolution equations in portfolio credit modelling

Cited in

(23)

• Well-posedness and tamed schemes for McKean-Vlasov equations with common noise
• Constructing unbiased gradient estimators with finite variance for conditional stochastic optimization
• Multilevel Monte Carlo for computing the SCR with the standard formula and other stress tests
• Multilevel Monte Carlo estimation of the expected value of sample information
• Decision-making under uncertainty: using MLMC for efficient estimation of EVPPI
• Finding expectations of monotone functions of binary random variables by simulation, with applications to reliability, finance, and round robin tournaments
• Multilevel Monte Carlo estimation of expected information gains
• Multilevel importance sampling for rare events associated with the McKean-Vlasov equation
• Multilevel Monte Carlo methods and lower-upper bounds in initial margin computations
• Analysis of nested multilevel Monte Carlo using approximate normal random variables
• Bias behaviour and antithetic sampling in mean-field particle approximations of SDEs nonlinear in the sense of McKean
• Iterative multilevel particle approximation for McKean-Vlasov SDEs
• Multilevel nested simulation for efficient risk estimation
• Unbiased MLMC-based variational Bayes for likelihood-free inference
• Limit theorems for weighted and regular multilevel estimators
• Efficient simulations for a Bernoulli mixture model of portfolio credit risk
• Credit risk propagation in structural-form models
• Simulation of Conditional Expectations Under Fast Mean-Reverting Stochastic Volatility Models
• Multilevel estimation of expected exit times and other functionals of stopped diffusions
• Unbiased MLMC stochastic gradient-based optimization of Bayesian experimental designs
• Weak error for nested multilevel Monte Carlo
• Multilevel and multi-index Monte Carlo methods for the McKean-Vlasov equation
• MLMC for nested expectations

This page was built for publication: Multilevel simulation of functionals of Bernoulli random variables with application to basket credit derivatives

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q496948)