Sample-path large deviations in credit risk

DOI10.1155/2011/354171MaRDI QIDQ410789zbMATH OpenOpenAlexWikidataFDO

Authors V. J. G. Leijdekker, M. R. H. Mandjes, P. J. C. Spreij

Publication date 4 April 2012

Published in Journal of Applied Mathematics (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/0909.5610

Mathematics Subject Classification ID

Credit risk (91G40)

Abstract: The event of large losses plays an important role in credit risk. As these large losses are typically rare, and portfolios usually consist of a large number of positions, large deviation theory is the natural tool to analyze the tail asymptotics of the probabilities involved. We first derive a sample-path large deviation principle (LDP) for the portfolio's loss process, which enables the computation of the logarithmic decay rate of the probabilities of interest. In addition, we derive exact asymptotic results for a number of specific rare-event probabilities, such as the probability of the loss process exceeding some given function.

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Cited in

(8)

• Default clustering in large pools: large deviations
• Some Applications and Methods of Large Deviations in Finance and Insurance
• LARGE DEVIATIONS IN MULTIFACTOR PORTFOLIO CREDIT RISK
• The topology of central counterparty clearing networks and network stability
• Large deviations built on max-stability
• Large portfolio losses
• A BSDE with delayed generator approach to pricing under counterparty risk and collateralization
• Recovery rates in investment-grade pools of credit assets: a large deviations analysis

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