We propose an original approximation method, which is based on Stein’s method and the zero bias transformation, to calculate CDO tranches in a general factor framework. We establish first-order correction terms for the Gaussian and the Poisson approximations respectively and we estimate the approximation errors. The application to the CDO pricing consists of combining the two approximations.
['N. El Karoui', 'Ying Jiao']
Stein’s method and zero bias transformation for CDO tranche pricing