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Approximating Independent Loss Distributions with an Adjusted Binomial Distribution

The author describes an approximation methodology for constructing independent loss distributions based on adjusting the binomial distribution. This method can handle both homogeneous and heterogeneous loss portfolios. He finds that this simple algorithm provides an excellent fit to the exact distribution for a broad range of correlations and portfolio credit quality.

Author(s) :

Dominic O'Kane

Summary :

The author describes an approximation methodology for constructing independent loss distributions based on adjusting the binomial distribution. This method can handle both homogeneous and heterogeneous loss portfolios. He finds that this simple algorithm provides an excellent fit to the exact distribution for a broad range of correlations and portfolio credit quality.

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Type : Working paper
Date : 26/04/2007
Keywords :

Asset Pricing