Heterogeneous credit portfolios and the dynamics of the aggregate losses

DOI10.1016/J.SPA.2009.03.006MaRDI QIDQ841485zbMATH OpenOpenAlexFDO

Authors Paolo Dai Pra, Marco Tolotti

Publication date 17 September 2009

Published in Stochastic Processes and their Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0806.3399

zbMATH Keywords

central limit theorems in Banach spacescredit contagionintensity based modelslarge deviationslarge portfolio losesrandom environment

Mathematics Subject Classification ID

Interacting random processes; statistical mechanics type models; percolation theory (60K35) Stochastic models in economics (91B70) Portfolio theory (91G10) Credit risk (91G40)

Abstract: We study the impact of contagion in a network of firms facing credit risk. We describe an intensity based model where the homogeneity assumption is broken by introducing a random environment that makes it possible to take into account the idiosyncratic characteristics of the firms. We shall see that our model goes behind the identification of groups of firms that can be considered basically exchangeable. Despite this heterogeneity assumption our model has the advantage of being totally tractable. The aim is to quantify the losses that a bank may suffer in a large credit portfolio. Relying on a large deviation principle on the trajectory space of the process, we state a suitable law of large number and a central limit theorem useful to study large portfolio losses. Simulation results are provided as well as applications to portfolio loss distribution analysis.

Review text

The authors study the impact of contagion in a network of firms credit risk. An intensity based model is described where the homogeneity assumption is broken by introducing a \textit{random environment} that makes it possible to take into account the idiosyncratic characteristics of the firms. The model goes behind the identification of groups of firms that can be considered basically exchangeable. Despite this heterogeneity assumption the model has the advantage of being totally tractable. The aim is to quantify the losses that a bank may suffer in a large credit portfolio. Relying on a large deviation principle on the trajectory space of the process, the authors state a suitable law of large numbers and a central limit theorem useful for studying large portfolio loses. Simulation results are provided as well as applications to portfolio loss distribution analysis.

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Cited in

(22)

• Large portfolio losses: A dynamic contagion model
• Long-range Ising model for credit portfolios with heterogeneous credit exposures
• Awareness, persuasion, and adoption: enriching the Bass model
• Default clustering in large portfolios: typical events
• Large portfolio losses in a turbulent market
• Mean field analysis of neural networks: a central limit theorem
• Comparing the value at risk performance of the CreditRisk\(^+\) and its enhancement: a large deviations approach
• Affine point processes: approximation and efficient simulation
• Fluctuation analysis for the loss from default
• Systemic risk and default clustering for large financial systems
• Mean field limits of particle-based stochastic reaction-diffusion models
• Network effects in default clustering for large systems
• Large portfolio credit risk modeling
• Large portfolio asymptotics for loss from default
• Mean field analysis of neural networks: a law of large numbers
• Default clustering in large pools: large deviations
• Optimal investment under information driven contagious distress
• Mean field limits of particle-based stochastic reaction-drift-diffusion models
• Fast mean-reversion asymptotics for large portfolios of stochastic volatility models
• The loss given default of a low-default portfolio with weak contagion
• Credit contagion and aggregate losses
• A simple mean field model for social interactions: dynamics, fluctuations, criticality

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