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Large portfolio losses: A dynamic contagion model

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Author Info

  • Paolo Dai Pra
  • Wolfgang J. Runggaldier
  • Elena Sartori
  • Marco Tolotti

Abstract

Using 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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File URL: http://arxiv.org/pdf/0704.1348
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Bibliographic Info

Paper provided by arXiv.org in its series Papers with number 0704.1348.

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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
Handle: RePEc:arx:papers:0704.1348

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Web page: http://arxiv.org/

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References

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  1. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
  2. Robert A. Jarrow, 2001. "Counterparty Risk and the Pricing of Defaultable Securities," Journal of Finance, American Finance Association, vol. 56(5), pages 1765-1799, October.
  3. Horst, Ulrich, 2007. "Stochastic cascades, credit contagion, and large portfolio losses," Journal of Economic Behavior & Organization, Elsevier, vol. 63(1), pages 25-54, May.
  4. Umut Cetin & R. Jarrow & P. Protter & Y. Yildirim, 2004. "Modeling credit risk with partial information," LSE Research Online Documents on Economics 2840, London School of Economics and Political Science, LSE Library.
  5. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
  6. Frey, Rudiger & McNeil, Alexander J., 2002. "VaR and expected shortfall in portfolios of dependent credit risks: Conceptual and practical insights," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1317-1334, July.
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Citations

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Cited by:
  1. Konstantinos Spiliopoulos & Justin A. Sirignano & Kay Giesecke, 2013. "Fluctuation Analysis for the Loss From Default," Papers 1304.1420, arXiv.org, revised Oct 2013.
  2. Emilio Barucci & Marco Tolotti, 2012. "Identity, reputation and social interaction with an application to sequential voting," Journal of Economic Interaction and Coordination, Springer, vol. 7(1), pages 79-98, May.
  3. Lijun Bo & Agostino Capponi, 2013. "Bilateral Credit Valuation Adjustment for Large Credit Derivatives Portfolios," Papers 1305.5575, arXiv.org.
  4. Lijun Bo & Agostino Capponi, 2014. "Bilateral credit valuation adjustment for large credit derivatives portfolios," Finance and Stochastics, Springer, vol. 18(2), pages 431-482, April.
  5. Paolo Dai Pra & Fulvio Fontini & Elena Sartori & Marco Tolotti, 2011. "Endogenous equilibria in liquid markets with frictions and boundedly rational agents," Working Papers 7, Department of Management, Università Ca' Foscari Venezia.
  6. Agostino Capponi & Martin Larsson, 2011. "Default and Systemic Risk in Equilibrium," Papers 1108.1133, arXiv.org, revised Dec 2011.
  7. Dai Pra, Paolo & Tolotti, Marco, 2009. "Heterogeneous credit portfolios and the dynamics of the aggregate losses," Stochastic Processes and their Applications, Elsevier, vol. 119(9), pages 2913-2944, September.
  8. Barucci, Emilio & Tolotti, Marco, 2012. "Social interaction and conformism in a random utility model," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1855-1866.
  9. Emilio Barucci & Marco Tolotti, 2009. "The dynamics of social interaction with agents’ heterogeneity," Working Papers 189, Department of Applied Mathematics, Università Ca' Foscari Venezia.
  10. Konstantinos Spiliopoulos, 2014. "Systemic Risk and Default Clustering for Large Financial Systems," Papers 1402.5352, arXiv.org.
  11. Igor Prünster & Matteo Ruggiero, 2011. "A Bayesian nonparametric approach to modeling market share dynamics," Carlo Alberto Notebooks 217, Collegio Carlo Alberto.
  12. Konstantinos Spiliopoulos & Richard B. Sowers, 2013. "Default Clustering in Large Pools: Large Deviations," Papers 1311.0498, arXiv.org.
  13. Kay Giesecke & Konstantinos Spiliopoulos & Richard B. Sowers, 2011. "Default clustering in large portfolios: Typical events," Papers 1104.1773, arXiv.org, revised Feb 2013.
  14. Kay Giesecke & Konstantinos Spiliopoulos & Richard B. Sowers & Justin A. Sirignano, 2011. "Large Portfolio Asymptotics for Loss From Default," Papers 1109.1272, arXiv.org, revised Oct 2013.

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