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Volume 47 Number 2 Volume 47 Number 3

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Research articles

ScienceAsia 47 (2021): 388-392 |doi: 10.2306/scienceasia1513-1874.2021.041

Refinement on Poisson approximation of CDOs

Nat Yonghinta, Kritsana Neammaneea,b,*

ABSTRACT:     A collateralized debt obligation (CDO) is a type of structured asset-backed securities. It is one of the causes of the financial crisis in 2007-2008. Jiao and Karoui [Finance Stoch 13 (2009):151-180] and Neammanee and Yonghint [Bull Malays Math Sci Soc 43 (2020):1135-1152] approximated the mean of CDO tranche loss by using Poisson distribution. In this paper, we improve their results by adding a correction term and show that the order of our bounds is better than those previous results. Our main tools are Stein-Chen's method and the technique from Neammanee and Thongtha [Stoch Model Appl 9 (2006):13-23].

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a Department of Mathematics and Computer Science, Faculty of Science, Chulalongkorn University, Bangkok 10330 Thailand
b Centre of Excellence in Mathematics, Commission on Higher Education, Bangkok 10400 Thailand

* Corresponding author, E-mail: Kritsana.N@chula.ac.th

Received 22 Jun 2020, Accepted 24 Mar 2021