Heterogeneous credit portfolios and the dynamics of the aggregate losses
We study the impact of contagion in a network of firms facing credit risk. We describe an intensity based model where the homogeneity assumption is broken by introducing a random environment that makes it possible to take into account the idiosyncratic characteristics of the firms. We shall see that our model goes behind the identification of groups of firms that can be considered basically exchangeable. Despite this heterogeneity assumption our model has the advantage of being totally tractable. The aim is to quantify the losses that a bank may suffer in a large credit portfolio. Relying on a large deviation principle on the trajectory space of the process, we state a suitable law of large numbers and a central limit theorem useful for studying large portfolio losses. Simulation results are provided as well as applications to portfolio loss distribution analysis.
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Volume (Year): 119 (2009)
Issue (Month): 9 (September)
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References listed on IDEAS
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- Amir Dembo & Jean-Dominique Deuschel & Darrell Duffie, 2004.
"Large portfolio losses,"
Finance and Stochastics,
Springer, vol. 8(1), pages 3-16, January.
- 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.
- Stefan Weber & Kay Giesecke, 2003. "Credit Contagion and Aggregate Losses," Computing in Economics and Finance 2003 246, Society for Computational Economics.
- 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.
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