Large Portfolio Losses: A dynamic contagion model

DefaultRisk.com the web's biggest credit risk modeling resource.

Submit Your Paper

Fitch Ratings Jobs

[ Worldwide]

Post Your Résumé
For Recruiters

Featured Book

Interest Rate Models -- Theory and Practice: With Smile, Inflation and Credit, 2^nd Edition
by Damiano Brigo and Fabio Mercurio, Springer, (May 19, 2006), Hardcover, 981 pages

Training Discounted for DefaultRisk.com visitors only:

The Mathematics of Credit Derivatives: The Essential Credit Modelling and Pricing Companion
by Philipp J. Schönbucher,
WBS Training, August 2003, DVD / Interactive CD-ROM

Sponsor:
Shop at Amazon.com and support DefaultRisk.com

Large Portfolio Losses: A dynamic contagion model

by Paolo Dai Pra of the University of Padova,
Wolfgang J. Runggaldier of the University of Padova,
Elena Sartori of the University of Padova, and
Marco Tolotti of Bocconi University

April 21, 2008

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.

Keywords: Credit contagion, credit crisis, interacting particle systems, Large Deviations, large portfolio losses, mean field interaction, non reversible Markov processes, phase transition.

Books Referenced in this Paper: (what is this?)