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Large portfolio losses

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Author Info

  • Amir Dembo

    ()

  • Jean-Dominique Deuschel

    ()

  • Darrell Duffie

    ()

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    Abstract

    This paper provide a large-deviations approximation of the tail distribution of total financial losses on a portfolio consisting of many positions. Applications include the total default losses on a bank portfolio, or the total claims against an insurer. The results may be useful in allocating exposure limits, and in allocating risk capital across different lines of business. Assuming that, for a given total loss, the distress caused by the loss is larger if the loss occurs within a smaller time period, we provide a large-deviations estimate of the likelihood that there will exist a sub-period of the future planning period during which a total loss of the critical severity occurs. Under conditions, this calculation is reduced to the calculation of the likelihood of the same sized loss over an initial time interval whose length is a property of the portfolio and the critical loss level. Copyright Springer-Verlag Berlin/Heidelberg 2004

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    File URL: http://hdl.handle.net/10.1007/s00780-003-0107-2
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    Bibliographic Info

    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 8 (2004)
    Issue (Month): 1 (January)
    Pages: 3-16
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    Handle: RePEc:spr:finsto:v:8:y:2004:i:1:p:3-16

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    Related research

    Keywords: Large deviations; insurance; risk measure; portfolio loss;

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    Citations

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    Cited by:
    1. Richard B. Sowers, 2009. "Exact Pricing Asymptotics of Investment-Grade Tranches of Synthetic CDO's Part I: A Large Homogeneous Pool," Quantitative Finance Papers 0903.4475, arXiv.org.
    2. Paolo Dai Pra & Marco Tolotti, 2008. "Heterogeneous credit portfolios and the dynamics of the aggregate losses," Quantitative Finance Papers 0806.3399, arXiv.org.
    3. Huyen Pham, 2007. "Some applications and methods of large deviations in finance and insurance," Quantitative Finance Papers math/0702473, arXiv.org, revised Feb 2007.

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