Importance sampling with splitting for portfolio credit risk

Jinyoung Kim, Sunggon Kim
2020 Communications for Statistical Applications and Methods  
We consider a credit portfolio with highly skewed exposures. In the portfolio, small number of obligors have very high exposures compared to the others. For the Bernoulli mixture model with highly skewed exposures, we propose a new importance sampling scheme to estimate the tail loss probability over a threshold and the corresponding expected shortfall. We stratify the sample space of the default events into two subsets. One consists of the events that the obligors with heavy exposures default
more » ... exposures default simultaneously. We expect that typical tail loss events belong to the set. In our proposed scheme, the tail loss probability and the expected shortfall corresponding to this type of events are estimated by a conditional Monte Carlo, which results in variance reduction. We analyze the properties of the proposed scheme mathematically. In numerical study, the performance of the proposed scheme is compared with an existing importance sampling method.
doi:10.29220/csam.2020.27.3.327 fatcat:v2ty5tde6jb4ph2vqsqp4zru6m