Default clustering in large pools: large deviations
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Abstract: We study large deviations and rare default clustering events in a dynamic large heterogeneous portfolio of interconnected components. Defaults come as Poisson events and the default intensities of the different components in the system interact through the empirical default rate and via systematic effects that are common to all components. We establish the large deviations principle for the empirical default rate for such an interacting particle system. The rate function is derived in an explicit form that is amenable to numerical computations and derivation of the most likely path to failure for the system itself. Numerical studies illustrate the theoretical findings. An understanding of the role of the preferred paths to large default rates and the most likely ways in which contagion and systematic risk combine to lead to large default rates would give useful insights into how to optimally safeguard against such events.
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Cited in
(16)- Stochastic evolution equations for large portfolios of stochastic volatility models
- An SPDE model for systemic risk with endogenous contagion
- Systemic risk and default clustering for large financial systems
- The law of large numbers for self-exciting correlated defaults
- Stochastic PDEs for large portfolios with general mean-reverting volatility processes
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- Moderate deviation principles for weakly interacting particle systems
- Importance sampling for a simple Markovian intensity model using subsolutions
- Recovery rates in investment-grade pools of credit assets: a large deviations analysis
- Fast mean-reversion asymptotics for large portfolios of stochastic volatility models
- Control of McKean-Vlasov SDEs with contagion through killing at a state-dependent intensity
- Network effects in default clustering for large systems
- Credit risk propagation in structural-form models
- On the effect of heterogeneity on flocking behavior and systemic risk
- Credit risk: simple closed-form approximate maximum likelihood estimator
- Affine point processes: approximation and efficient simulation
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