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Fluctuation Analysis for the Loss From Default

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  • Konstantinos Spiliopoulos
  • Justin A. Sirignano
  • Kay Giesecke
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    Abstract

    We analyze the fluctuation of the loss from default around its large portfolio limit in a class of reduced-form models of correlated firm-by-firm default timing. We prove a weak convergence result for the fluctuation process and use it for developing a conditionally Gaussian approximation to the loss distribution. Numerical results illustrate the accuracy and computational efficiency of the approximation.

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    File URL: http://arxiv.org/pdf/1304.1420
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1304.1420.

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    Date of creation: Apr 2013
    Date of revision: Oct 2013
    Handle: RePEc:arx:papers:1304.1420

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    Web page: http://arxiv.org/

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    1. Stefan Weber & Kay Giesecke, 2003. "Credit Contagion and Aggregate Losses," Computing in Economics and Finance 2003 246, Society for Computational Economics.
    2. 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.
    3. Paolo Dai Pra & Marco Tolotti, 2008. "Heterogeneous credit portfolios and the dynamics of the aggregate losses," Papers 0806.3399, arXiv.org.
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    Cited by:
    1. Konstantinos Spiliopoulos & Richard B. Sowers, 2013. "Default Clustering in Large Pools: Large Deviations," Papers 1311.0498, arXiv.org.

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