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 number and a central limit theorem useful to study large portfolio losses. Simulation results are provided as well as applications to portfolio loss distribution analysis.
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- Huyen Pham, 2007. "Some applications and methods of large deviations in finance and insurance," Papers math/0702473, arXiv.org, revised Feb 2007.
- Rüdiger Frey & Jochen Backhaus, 2008. "Pricing And Hedging Of Portfolio Credit Derivatives With Interacting Default Intensities," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(06), pages 611-634.
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- Amir Dembo & Jean-Dominique Deuschel & Darrell Duffie, 2004.
"Large portfolio losses,"
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- Amir Dembo & Jean-Deominique Deuschel & Darrell Duffie, 2002. "Large Portfolio Losses," NBER Working Papers 9177, National Bureau of Economic Research, Inc.
- Stefan Weber & Kay Giesecke, 2003. "Credit Contagion and Aggregate Losses," Computing in Economics and Finance 2003 246, Society for Computational Economics. Full references (including those not matched with items on IDEAS)
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