The Annals of Applied Probability

Large portfolio losses: A dynamic contagion model

Paolo Dai Pra, Wolfgang J. Runggaldier, Elena Sartori, and Marco Tolotti

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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.

Article information

Source
Ann. Appl. Probab., Volume 19, Number 1 (2009), 347-394.

Dates
First available in Project Euclid: 20 February 2009

Permanent link to this document
https://projecteuclid.org/euclid.aoap/1235140342

Digital Object Identifier
doi:10.1214/08-AAP544

Mathematical Reviews number (MathSciNet)
MR2498681

Zentralblatt MATH identifier
1159.60353

Subjects
Primary: 60K35: Interacting random processes; statistical mechanics type models; percolation theory [See also 82B43, 82C43] 91B70: Stochastic models

Keywords
Credit contagion credit crisis interacting particle systems large deviations large portfolio losses mean field interaction nonreversible Markov processes phase transition

Citation

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


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