Large portfolio losses: A dynamic contagion model
AbstractUsing particle system methodologies we study the propagation of financial distress in a network of firms facing credit risk. We investigate the phenomenon of a credit crisis and quantify the losses that a bank may suffer in a large credit portfolio. Applying a large deviation principle we compute the limiting distributions of the system and determine the time evolution of the credit quality indicators of the firms, deriving moreover the dynamics of a global financial health indicator. We finally describe a suitable version of the "Central Limit Theorem" useful to study large portfolio losses. Simulation results are provided as well as applications to portfolio loss distribution analysis.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 0704.1348.
Date of creation: Apr 2007
Date of revision: Mar 2009
Publication status: Published in Annals of Applied Probability 2009, Vol. 19, No. 1, 347-394
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