Fast Computation Of the Economic Capital, the Value at Risk and the Greeks of a Loan Portfolio in the Gaussian Factor Model

We propose a fast algorithm for computing the economic capital, Value at Risk and Greeks in the Gaussian factor model. The algorithm proposed here is much faster than brute force Monte Carlo simulations or Fourier transform based methods [1]. While the algorithm of Hull-White [3] is comparably fast, it assumes that all the loans in the portfolio have equal notionals and recovery rates. This is a very restrictive assumption which is unrealistic for many portfolios encountered in practice. Our algorithm makes no assumptions about the homogeneity of the portfolio. Additionally, it is easier to implement than the algorithm of Hull-White. We use the implicit function theorem to derive analytic expressions for the Greeks. This work was supported by the Director, Office of Science, Office of Advanced Scientific Computing Research, of the U.S. Department of Energy under Contract No. DEAC03-76SF00098. E-mail: [email protected]