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Modeling portfolio loss distribution under infectious defaults and immunization

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  • Gianluca Farina
  • Rosella Giacometti
  • Gabriele Torri

Abstract

We introduce a model for the loss distribution of a credit portfolio considering a contagion mechanism for the default of names which is the result of two independent components: an infection attempt generated by defaulting entities and a failed defence from healthy ones. We then propose an efficient recursive algorithm for the loss distribution. Then we extend the framework with a more flexible mixture distribution to better fit real-world data. Finally, we propose an empirical application in which we price synthetic CDO tranches of the iTraxx index, finding a good fit for multiple tranches.

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  • Gianluca Farina & Rosella Giacometti & Gabriele Torri, 2025. "Modeling portfolio loss distribution under infectious defaults and immunization," Papers 2503.03306, arXiv.org.
    • Handle: RePEc:arx:papers:2503.03306
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    References listed on IDEAS

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