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Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity by Frédéric Patras, Damiano Brigo, Tomasz R. Bielecki

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Chapter 21

Interacting Path Systems for Credit Risk

Pierre Del Moral

Centre INRIA Bordeaux Sud-Ouest and Institut de Mathématiques de Bordeaux

Frédéric Patras

Université de Nice and Zeliade Systems

Interacting particle systems provide one of the most efficient ways to perform variance reduction in Monte Carlo approaches to rare events analysis. This chapter is meant as a general introduction to the theory with a particular emphasis toward applications to credit risk. We survey the main techniques and results, illustrate them with recent findings, and propose a new class of algorithms (referred to as interacting path systems) suited to the analysis of multiple defaults in credit portfolios.

21.1 Introduction

Let us consider one of the simplest ...

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