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Higher Order Large Deviation Approximations Applied to CDO Pricing

by Laurent Veilex of Credit Suisse

February 2007

Abstract: We propose a Large Deviation approximation for the loss distribution of a credit portfolio and compare it as well as higher order Saddle-point and Edgeworth expansions with the standard recursion method for the pricing of CDO tranches.

Keywords: Edgeworth expansions, Large Deviation Approximations, Gram-Charlier expansions, Saddle-point, base correlation, CDO, copula, local correlation.

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