Abstract
We derive two types of saddlepoint approximations for expectations in the form of E[(X - K)+], where X is the sum of n independent random variables and K is a known constant. We establish error convergence rates for both types of approximations in the independently and identically distributed case. The approximations are further extended to cover the case of lattice variables. An application of the saddlepoint approximations to CDO pricing is presented.
Original language | English |
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Pages (from-to) | 692-714 |
Number of pages | 23 |
Journal | SIAM Journal on Financial Mathematics |
Volume | 2 |
Issue number | 1 |
DOIs | |
Publication status | Published - 2011 |
Externally published | Yes |
Keywords
- Expectation
- Lattice variables
- Price of collateralized debt obligations
- Saddlepoint approximation