Default Clustering in Large Pools: Large Deviations
Konstantinos Spiliopoulos and
Richard B. Sowers
Papers from arXiv.org
We study large deviations and rare default clustering events in a dynamic large heterogeneous portfolio of interconnected components. Defaults come as Poisson events and the default intensities of the different components in the system interact through the empirical default rate and via systematic effects that are common to all components. We establish the large deviations principle for the empirical default rate for such an interacting particle system. The rate function is derived in an explicit form that is amenable to numerical computations and derivation of the most likely path to failure for the system itself. Numerical studies illustrate the theoretical findings. An understanding of the role of the preferred paths to large default rates and the most likely ways in which contagion and systematic risk combine to lead to large default rates would give useful insights into how to optimally safeguard against such events.
New Economics Papers: this item is included in nep-rmg
Date: 2013-11, Revised 2015-02
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
http://arxiv.org/pdf/1311.0498 Latest version (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1311.0498
Access Statistics for this paper
More papers in Papers from arXiv.org
Series data maintained by arXiv administrators ().