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Heterogeneous credit portfolios and the dynamics of the aggregate losses

  • Paolo Dai Pra
  • Marco Tolotti

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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File URL: http://arxiv.org/pdf/0806.3399
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Paper provided by arXiv.org in its series Papers with number 0806.3399.

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Date of creation: Jun 2008
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Handle: RePEc:arx:papers:0806.3399
Contact details of provider: Web page: http://arxiv.org/

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  1. Amir Dembo & Jean-Deominique Deuschel & Darrell Duffie, 2002. "Large Portfolio Losses," NBER Working Papers 9177, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. Stefan Weber & Kay Giesecke, 2003. "Credit Contagion and Aggregate Losses," Computing in Economics and Finance 2003 246, Society for Computational Economics.
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