IMPORTANCE SAMPLING AND INTERACTING PARTICLE SYSTEMS FOR THE ESTIMATION OF MARKOVIAN CREDIT PORTFOLIOS LOSS DISTRIBUTION

The goal of the paper is the numerical analysis of the performance of Monte Carlo simulation based methods for the computation of credit-portfolio loss-distributions in the context of Markovian intensity models of credit risk. We concentrate on two of the most frequently touted methods of variance reduction in the case of stochastic processes: importance sampling (IS) and interacting particle systems (IPS) based algorithms. Because the subtle differences between these methods are often misunderstood, as IPS is often regarded as a mere particular case of IP, we describe in detail the two kinds of algorithms, and we highlight their fundamental differences. We then proceed to a detailed comparative case study based on benchmark numerical experiments chosen for their popularity in the quantitative finance circles. (RC) Bendheim Center for Finance ORFE, Princeton University Princeton, NJ 08544 USA (SC) Département de Mathématiques Université d’Évry Val d’Essonne 91025 Évry Cedex, France