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/|
References listed on IDEAS
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- Umut Cetin & Robert Jarrow & Philip Protter & Yildiray Yildirim, 2004.
"Modeling Credit Risk with Partial Information,"
- 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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- Robert A. Jarrow, 2001. "Counterparty Risk and the Pricing of Defaultable Securities," Journal of Finance, American Finance Association, vol. 56(5), pages 1765-1799, October.
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