Saddlepoint approximations for expectations and an application to CDO pricing

Xinzheng Huang*, Cornelis W. Oosterlee

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

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 languageEnglish
Pages (from-to)692-714
Number of pages23
JournalSIAM Journal on Financial Mathematics
Volume2
Issue number1
DOIs
Publication statusPublished - 2011
Externally publishedYes

Keywords

  • Expectation
  • Lattice variables
  • Price of collateralized debt obligations
  • Saddlepoint approximation

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