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Fluctuation Analysis for the Loss From Default

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  • Konstantinos Spiliopoulos
  • Justin A. Sirignano
  • Kay Giesecke

Abstract

We analyze the fluctuation of the loss from default around its large portfolio limit in a class of reduced-form models of correlated firm-by-firm default timing. We prove a weak convergence result for the fluctuation process and use it for developing a conditionally Gaussian approximation to the loss distribution. Numerical results illustrate the accuracy and computational efficiency of the approximation.

Suggested Citation

  • Konstantinos Spiliopoulos & Justin A. Sirignano & Kay Giesecke, 2013. "Fluctuation Analysis for the Loss From Default," Papers 1304.1420, arXiv.org, revised Feb 2015.
    • Handle: RePEc:arx:papers:1304.1420
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    References listed on IDEAS

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    1. Stefan Weber & Kay Giesecke, 2003. "Credit Contagion and Aggregate Losses," Computing in Economics and Finance 2003 246, Society for Computational Economics.
    2. 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.
    3. 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.
    4. Kim, Kyeong-Hun, 2009. "Sobolev space theory of SPDEs with continuous or measurable leading coefficients," Stochastic Processes and their Applications, Elsevier, vol. 119(1), pages 16-44, January.
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    Cited by:

    1. Konstantinos Spiliopoulos & Richard B. Sowers, 2013. "Default Clustering in Large Pools: Large Deviations," Papers 1311.0498, arXiv.org, revised Feb 2015.

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