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Default clustering in large portfolios: Typical events

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  • Kay Giesecke
  • Konstantinos Spiliopoulos
  • Richard B. Sowers

Abstract

We develop a dynamic point process model of correlated default timing in a portfolio of firms, and analyze typical default profiles in the limit as the size of the pool grows. In our model, a firm defaults at a stochastic intensity that is influenced by an idiosyncratic risk process, a systematic risk process common to all firms, and past defaults. We prove a law of large numbers for the default rate in the pool, which describes the "typical" behavior of defaults.

Suggested Citation

  • Kay Giesecke & Konstantinos Spiliopoulos & Richard B. Sowers, 2011. "Default clustering in large portfolios: Typical events," Papers 1104.1773, arXiv.org, revised Feb 2013.
    • Handle: RePEc:arx:papers:1104.1773
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    References listed on IDEAS

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    1. Giesecke, Kay & Weber, Stefan, 2006. "Credit contagion and aggregate losses," Journal of Economic Dynamics and Control, Elsevier, vol. 30(5), pages 741-767, May.
    2. Sanjiv R. Das & Darrell Duffie & Nikunj Kapadia & Leandro Saita, 2007. "Common Failings: How Corporate Defaults Are Correlated," Journal of Finance, American Finance Association, vol. 62(1), pages 93-117, February.
    3. Amir Dembo & Jean-Dominique Deuschel & Darrell Duffie, 2004. "Large portfolio losses," Finance and Stochastics, Springer, vol. 8(1), pages 3-16, January.
    4. Darrell Duffie & Jun Pan & Kenneth Singleton, 2000. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," Econometrica, Econometric Society, vol. 68(6), pages 1343-1376, November.
    5. Dai Pra, Paolo & Tolotti, Marco, 2009. "Heterogeneous credit portfolios and the dynamics of the aggregate losses," Stochastic Processes and their Applications, Elsevier, vol. 119(9), pages 2913-2944, September.
    6. Paolo Dai Pra & Wolfgang J. Runggaldier & Elena Sartori & Marco Tolotti, 2007. "Large portfolio losses: A dynamic contagion model," Papers 0704.1348, arXiv.org, revised Mar 2009.
    7. Paul Glasserman & Wanmo Kang & Perwez Shahabuddin, 2007. "Large Deviations In Multifactor Portfolio Credit Risk," Mathematical Finance, Wiley Blackwell, vol. 17(3), pages 345-379, July.
    8. Stefan Weber & Kay Giesecke, 2003. "Credit Contagion and Aggregate Losses," Computing in Economics and Finance 2003 246, Society for Computational Economics.
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