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Default clustering in large portfolios: Typical events

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  • Kay Giesecke
  • Konstantinos Spiliopoulos
  • Richard B. Sowers
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    Abstract

    We develop a dynamic point process model of correlated default timing in a portfolio of firms, and analyze typical default profiles in the limit as the size of the pool grows. In our model, a firm defaults at a stochastic intensity that is influenced by an idiosyncratic risk process, a systematic risk process common to all firms, and past defaults. We prove a law of large numbers for the default rate in the pool, which describes the "typical" behavior of defaults.

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    File URL: http://arxiv.org/pdf/1104.1773
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1104.1773.

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    Date of creation: Apr 2011
    Date of revision: Feb 2013
    Publication status: Published in Annals of Applied Probability 2013, Vol. 23, No. 1, 348-385
    Handle: RePEc:arx:papers:1104.1773

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    Web page: http://arxiv.org/

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    1. Sanjiv Das & Darrell Duffie & Nikunj Kapadia & Leandro Saita, 2006. "Common Failings: How Corporate Defaults are Correlated," NBER Working Papers 11961, National Bureau of Economic Research, Inc.
    2. Dai Pra, Paolo & Tolotti, Marco, 2009. "Heterogeneous credit portfolios and the dynamics of the aggregate losses," Stochastic Processes and their Applications, Elsevier, Elsevier, vol. 119(9), pages 2913-2944, September.
    3. Paolo Dai Pra & Wolfgang J. Runggaldier & Elena Sartori & Marco Tolotti, 2007. "Large portfolio losses: A dynamic contagion model," Papers 0704.1348, arXiv.org, revised Mar 2009.
    4. Stefan Weber & Kay Giesecke, 2003. "Credit Contagion and Aggregate Losses," Computing in Economics and Finance 2003, Society for Computational Economics 246, Society for Computational Economics.
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    Cited by:
    1. Lijun Bo & Agostino Capponi, 2014. "Bilateral credit valuation adjustment for large credit derivatives portfolios," Finance and Stochastics, Springer, Springer, vol. 18(2), pages 431-482, April.
    2. Konstantinos Spiliopoulos & Richard B. Sowers, 2013. "Default Clustering in Large Pools: Large Deviations," Papers 1311.0498, arXiv.org.
    3. Lijun Bo & Agostino Capponi, 2013. "Bilateral Credit Valuation Adjustment for Large Credit Derivatives Portfolios," Papers 1305.5575, arXiv.org.
    4. Konstantinos Spiliopoulos, 2014. "Systemic Risk and Default Clustering for Large Financial Systems," Papers 1402.5352, arXiv.org.

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