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.
"Large portfolio losses: A dynamic contagion model." Ann. Appl. Probab. 19 (1) 347 - 394, February 2009. https://doi.org/10.1214/08-AAP544