The Annals of Applied Probability
- Ann. Appl. Probab.
- Volume 19, Number 1 (2009), 347-394.
Large portfolio losses: A dynamic contagion model
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.
Ann. Appl. Probab., Volume 19, Number 1 (2009), 347-394.
First available in Project Euclid: 20 February 2009
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Dai Pra, Paolo; Runggaldier, Wolfgang J.; Sartori, Elena; Tolotti, Marco. Large portfolio losses: A dynamic contagion model. Ann. Appl. Probab. 19 (2009), no. 1, 347--394. doi:10.1214/08-AAP544. https://projecteuclid.org/euclid.aoap/1235140342