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Finance and Stochastics

, Volume 13, Issue 2, pp 151–180 | Cite as

Stein’s method and zero bias transformation for CDO tranche pricing

  • N. El Karoui
  • Y. Jiao
Article

Abstract

We propose an original approximation method, which is based on Stein’s method and the zero bias transformation, to calculate CDO tranches in a general factor framework. We establish first-order correction terms for the Gaussian and the Poisson approximations respectively and we estimate the approximation errors. The application to the CDO pricing consists of combining the two approximations.

Keywords

Stein’s method Zero bias transformation CDO pricing Gaussian and Poisson approximations 

Mathematics Subject Classification (2000)

60F05 91B99 

JEL Classification

C02 C63 

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Copyright information

© Springer-Verlag 2008

Authors and Affiliations

  1. 1.Centre de Mathématiques AppliquéesEcole PolytechniquePalaiseauFrance
  2. 2.Laboratoire de probabilités et modèles aléatoiresUniversité Paris 7Paris Cedex 05France

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