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Default clustering in large portfolios: Typical events

  • Kay Giesecke
  • Konstantinos Spiliopoulos
  • Richard B. Sowers
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    We develop a dynamic point process model of correlated default timing in a portfolio of firms, and analyze typical default profiles in the limit as the size of the pool grows. In our model, a firm defaults at a stochastic intensity that is influenced by an idiosyncratic risk process, a systematic risk process common to all firms, and past defaults. We prove a law of large numbers for the default rate in the pool, which describes the "typical" behavior of defaults.

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    Paper provided by in its series Papers with number 1104.1773.

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    Date of creation: Apr 2011
    Date of revision: Feb 2013
    Publication status: Published in Annals of Applied Probability 2013, Vol. 23, No. 1, 348-385
    Handle: RePEc:arx:papers:1104.1773
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    1. Stefan Weber & Kay Giesecke, 2003. "Credit Contagion and Aggregate Losses," Computing in Economics and Finance 2003 246, Society for Computational Economics.
    2. Dai Pra, Paolo & Tolotti, Marco, 2009. "Heterogeneous credit portfolios and the dynamics of the aggregate losses," Stochastic Processes and their Applications, Elsevier, vol. 119(9), pages 2913-2944, September.
    3. Sanjiv Das & Darrell Duffie & Nikunj Kapadia & Leandro Saita, 2006. "Common Failings: How Corporate Defaults are Correlated," NBER Working Papers 11961, National Bureau of Economic Research, Inc.
    4. Paolo Dai Pra & Wolfgang J. Runggaldier & Elena Sartori & Marco Tolotti, 2007. "Large portfolio losses: A dynamic contagion model," Papers 0704.1348,, revised Mar 2009.
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