Large portfolio losses: A dynamic contagion model

Paolo Dai Pra, Wolfgang J. Runggaldier, Elena Sartori and Marco Tolotti

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Abstract: 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.

Date: 2007-04, Revised 2009-03
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Citations: View citations in EconPapers (31)

Published in Annals of Applied Probability 2009, Vol. 19, No. 1, 347-394

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:0704.1348

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