February 3rd, 2016, 1:53 pm
I've thinking about this (not much, these days are being busy). I need to do some tests but at least mathematically, I think we can tackle the non linear collateral (MATA and thresholds) just by adding more indicators...We lose part of the advantage in that, as I said, now you depend of the regression function across the full range of the regressors but, its usage is still limited to establish if certain condition is met by the future value. So, while we do not have the 'full' advantage we have one that is, for me , crucial: perfect netting!: if we have 2 identical deals that net one to each other we will get perfect zero exposure. This is not guarantee when you use regressions unless both regression function are coming from the same calculation/system/model. Now you might not have perfect regressions and it could be the case that they do not net and the indicator is not 0 but, as you continue evolving your cashflows they will cancel out.We can always find more accurate methods in a per deal basis but the advantage of this technique is, in my view, the possibility of tackling something more generic in a automated way.