Bounds on Negative Binomial Approximation to Call Function

Abstract

In this paper, we develop Stein's method for negative binomial distribution using call function defined by f_z(k) = (k - z)⁺ = max{k - z, 0}, for k ≥ 0 and z ≥ 0. We obtain error bounds between E [ f_z(N_r,p)] and E [ f_z(V )], where N_r,p follows negative binomial distribution and V is the sum of locally dependent random variables, using certain conditions on moments. We demonstrate our results through an interesting application, namely, collateralized debt obligation (CDO), and compare the bounds with the existing bounds.