A credit loss control variable
Viktor Tchistiakov, Jeroen de Smet and Peter-Paul Hoogbruin explain and demonstrate how the efficiency of Monte Carlo simulation in valuing a portfolio of credit risky exposures is improved by the use of the Vasicek distribution as a control variable. An appropriate control variable is derived from the limiting distribution of a homogeneous portfolio that approximates the modelled portfolio and the authors show that this yields more accurate estimates, especially at very low loss probabilities.
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