Large portfolio losses: A dynamic contagion model
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.
|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|
|Contact details of provider:|| Web page: http://arxiv.org/|
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- Umut Çetin & Robert Jarrow & Philip Protter & Yildiray Yildirim, 2008.
"Modeling Credit Risk With Partial Information,"
World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 23, pages 579-590
World Scientific Publishing Co. Pte. Ltd..
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