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Large portfolio losses: A dynamic contagion model. (English) Zbl 1159.60353

Summary: Using particle system methodologies we study the propagation of financial distress in a network of firms facing credit risk. We investigate the phenomenon of a credit crisis and quantify the losses that a bank may suffer in a large credit portfolio. Applying a large deviation principle we compute the limiting distributions of the system and determine the time evolution of the credit quality indicators of the firms, deriving moreover the dynamics of a global financial health indicator. We finally describe a suitable version of the “Central Limit Theorem” useful to study large portfolio losses. Simulation results are provided as well as applications to portfolio loss distribution analysis.

MSC:

60K35 Interacting random processes; statistical mechanics type models; percolation theory
91B70 Stochastic models in economics

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References:

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