A correlated overflow model with a view towards applications in credit risk (Q2627622)

Summary: In this paper we present and explicitly solve a specific multi-dimensional, correlated overflow problem. Due to the ordering of the underlying components in our model, explicit results are obtained for the probabilities under consideration; importantly, the results are not in terms of Laplace transforms. In our setting, each component behaves as a compound Poisson process with unit-sized upward jumps, decreased by a linear drift. The approach relies on a \textit{V. Beneš} [``General stochastic processes in the theory of queues''. Addison-Wesley Publishing Co., Inc., Reading, Mass.-Palo Alto, Calif.-London (1963; Zbl 1362.60001)] type argumentation, that is, the idea of partitioning the overflow event with respect to the last `exceedance epoch'. This type of problems arises naturally in various branches of applied probability, and therefore has several applications. In this paper we point out two specific application areas: one in mathematical finance, and one in queueing. In the former, several `obligors' (whose `distances-to-default' are correlated, as is the case in practice) are considered, and it is quantified how likely it is that there are defaults before a given time \(T\). In the latter, one is often interested in the workload or storage process; the results of this paper provide expressions for overflow probabilities in the context of specific coupled queuing systems.