Large portfolio losses: A dynamic contagion model
Paolo Dai Pra, Wolfgang J. Runggaldier, Elena Sartori, and Marco Tolotti
Source: Ann. Appl. Probab. Volume 19, Number 1
(2009), 347-394.
Abstract
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.
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Keywords: Credit contagion; credit crisis; interacting particle systems; large deviations; large portfolio losses; mean field interaction; nonreversible Markov processes; phase transition
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Permanent link to this document: http://projecteuclid.org/euclid.aoap/1235140342
Digital Object Identifier: doi:10.1214/08-AAP544
Mathematical Reviews number (MathSciNet): MR2498681
Zentralblatt MATH identifier: 1159.60353
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