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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- Horst, Ulrich, 2007. "Stochastic cascades, credit contagion, and large portfolio losses," Journal of Economic Behavior & Organization, Elsevier, vol. 63(1), pages 25-54, May.
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Elsevier, vol. 24(1-2), pages 119-149, January.
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"Modeling credit risk with partial information,"
LSE Research Online Documents on Economics
2840, London School of Economics and Political Science, LSE Library.
- 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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