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Heterogeneous credit portfolios and the dynamics of the aggregate losses

descriptionPublicationkeyboard_double_arrow_right Article , Preprint 01 Sep 2009Embargo end date: 01 Jan 2008 Italy Publisher:Elsevier BVJournal:Stochastic Processes and their Applications, volume 119, pages 2,913-2,944 (issn: 0304-4149,

Authors: DAI PRA P; TOLOTTI, Marco;

doi: 10.1016/j.spa.2009.03.006 , 10.48550/arxiv.0806.3399

arXiv: http://arxiv.org/abs/0806.3399

handle: 11562/1009581 , 10278/29267 , 11577/2377543

Heterogeneous credit portfolios and the dynamics of the aggregate losses

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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.

35 pages, 3 figures

Country

Italy

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Keywords

Random environment, Statistics and Probability, Credit contagion, 60K35; 91B70, Applied Mathematics, Probability (math.PR), Central limit theorems in Banach spaces, Central limit theorems in Banach spaces; Credit contagion; Intensity based models; Large deviations; Large portfolio losses; Random environment, Intensity based models, FOS: Economics and business, Large deviations, 91B70, Large portfolio losses, 60K35, Modelling and Simulation, Risk Management (q-fin.RM), FOS: Mathematics, Mathematics - Probability, Quantitative Finance - Risk Management

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