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A Fast Algorithm for Computing Expected Loan Portfolio Tranche Loss in the Gaussian Factor Model

by Pavel Okunev of LBNL and University of California, Berkeley

June 19, 2005

Abstract: We propose a fast algorithm for computing the expected tranche loss in the Gaussian factor model with arbitrary accuracy using Hermite expansions. No assumptions about homogeneity of the portfolio are made. It is intended as an alternative to the much slower Fourier transform based methods.

Keywords: Moody's Fourier Transform method, portfolio loss distribution, DJCDX, CDS portfolio, CDS, expected tranche loss.

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