Pré-Publication, Document De Travail Année : 2018

Nonlinear Monte Carlo schemes for counterparty risk on credit derivatives

Tuyet Mai Nguyen
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Résumé

Two nonlinear Monte Carlo schemes, namely, the linear Monte Carlo expansion with randomization of Fujii and Takahashi (2012a,2012b) and the marked branching diffusion scheme of Henry-Labordère (2012), are compared in terms of applicability and numerical behavior regarding counterparty risk computations on credit derivatives. This is done in two dynamic copula models of portfolio credit risk: the dynamic Gaussian copula model and the model in which default dependence stems from joint defaults. For such high-dimensional and nonlinear pricing problems, more standard deterministic or simulation/regression schemes are ruled out by Bellman's " curse of dimensionality " and only purely forward Monte Carlo schemes can be used.

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hal-01764400 , version 1 (11-04-2018)

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Stéphane Crépey, Tuyet Mai Nguyen. Nonlinear Monte Carlo schemes for counterparty risk on credit derivatives. 2018. ⟨hal-01764400⟩
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