Systemic Risk and Default Clustering for Large Financial Systems

As it is known in the finance risk and macroeconomics literature, risk-sharing in large portfolios may increase the probability of creation of default clusters and of systemic risk. We review recent developments on mathematical and computational tools for the quantification of such phenomena. Limiting analysis such as law of large numbers and central limit theorems allow to approximate the distribution in large systems and study quantities such as the loss distribution in large portfolios. Large deviations analysis allow us to study the tail of the loss distribution and to identify pathways to default clustering. Sensitivity analysis allows to understand the most likely ways in which different effects, such as contagion and systematic risks, combine to lead to large default rates. Such results could give useful insights into how to optimally safeguard against such events.

[1]  Oldrich A Vasicek Limiting Loan Loss Probability Distribution , 2015 .

[2]  Konstantinos Spiliopoulos,et al.  Default Clustering in Large Pools: Large Deviations , 2013, SIAM J. Financial Math..

[3]  Benedikt Wirth,et al.  Fast Automated Detection of Crystal Distortion and Crystal Defects in Polycrystal Images , 2014, Multiscale Model. Simul..

[4]  D. O'Kane Oxford Handbook of Credit Derivatives , 2014 .

[5]  Lijun Bo,et al.  Bilateral credit valuation adjustment for large credit derivatives portfolios , 2014, Finance Stochastics.

[6]  Jean-Pierre Fouque,et al.  Stability in a Model of Interbank Lending , 2013, SIAM J. Financial Math..

[7]  Justin A. Sirignano,et al.  Fluctuation Analysis for the Loss from Default , 2013, 1304.1420.

[8]  Josselin Garnier,et al.  Large Deviations for a Mean Field Model of Systemic Risk , 2012, SIAM J. Financial Math..

[9]  K. Spiliopoulos,et al.  Default clustering in large portfolios: Typical events. , 2011, 1104.1773.

[10]  J. Fouque,et al.  STABILITY IN A MODEL OF INTER-BANK LENDING , 2013 .

[11]  Jakša Cvitanić,et al.  The Law of Large Numbers for self-exciting correlated defaults , 2012 .

[12]  Christoph Meinerding ASSET ALLOCATION AND ASSET PRICING IN THE FACE OF SYSTEMIC RISK: A LITERATURE OVERVIEW AND ASSESSMENT , 2012 .

[13]  Konstantinos Spiliopoulos,et al.  Importance Sampling for Multiscale Diffusions , 2011, Multiscale Model. Simul..

[14]  Kay Giesecke,et al.  Sequential Importance Sampling and Resampling for Dynamic Portfolio Credit Risk , 2012, Oper. Res..

[15]  Justin A. Sirignano,et al.  LARGE PORTFOLIO ASYMPTOTICS FOR LOSS FROM DEFAULT , 2011, 1109.1272.

[16]  Christoph Reisinger,et al.  Stochastic Evolution Equations in Portfolio Credit Modelling , 2011, SIAM J. Financial Math..

[17]  Stéphane Crépey,et al.  Markov Chain Models of Portfolio Credit Risk , 2011 .

[18]  Francis Comets,et al.  Large Deviations and Applications , 2011, International Encyclopedia of Statistical Science.

[19]  K. Spiliopoulos,et al.  Recovery Rates in Investment-Grade Pools of Credit Assets: A Large Deviations Analysis , 2010, 1006.2711.

[20]  R. Carmona,et al.  Particle Methods For The Estimation Of Credit Portfolio Loss Distributions , 2010 .

[21]  Yacine Ait-Sahalia,et al.  Modeling Financial Contagion Using Mutually Exciting Jump Processes , 2010 .

[22]  Ronnie Sircar,et al.  Utility valuation of multi-name credit derivatives and application to CDOs , 2010 .

[23]  Kay Giesecke,et al.  Exact and Efficient Simulation of Correlated Defaults , 2010, SIAM J. Financial Math..

[24]  René Carmona,et al.  Interacting particle systems for the computation of rare credit portfolio losses , 2009, Finance Stochastics.

[25]  Gerardo Rubino,et al.  Introduction to Rare Event Simulation , 2009, Rare Event Simulation using Monte Carlo Methods.

[26]  P. D. Pra,et al.  Heterogeneous credit portfolios and the dynamics of the aggregate losses , 2008, 0806.3399.

[27]  Sandeep Juneja,et al.  Portfolio Credit Risk with Extremal Dependence: Asymptotic Analysis and Efficient Simulation , 2008, Oper. Res..

[28]  Thomas G. Kurtz,et al.  Macroscopic limits for stochastic partial differential equations of McKean–Vlasov type , 2008 .

[29]  Peter W. Glynn,et al.  Stochastic Simulation: Algorithms and Analysis , 2007 .

[30]  Paul Glasserman,et al.  LARGE DEVIATIONS IN MULTIFACTOR PORTFOLIO CREDIT RISK , 2007 .

[31]  W. Runggaldier,et al.  Large portfolio losses: A dynamic contagion model , 2007, 0704.1348.

[32]  Paul Dupuis,et al.  Subsolutions of an Isaacs Equation and Efficient Schemes for Importance Sampling , 2005, Math. Oper. Res..

[33]  Sachin Jain,et al.  Efficient Importance Sampling for Reduced Form Models in Credit Risk , 2006, Proceedings of the 2006 Winter Simulation Conference.

[34]  Utility Valuation of Credit Derivatives and Application to CDOs , 2006 .

[35]  Paul Glasserman,et al.  Importance Sampling for Portfolio Credit Risk , 2005, Manag. Sci..

[36]  Dominic O'Kane,et al.  A note on the large homogeneous portfolio approximation with the Student-t copula , 2005, Finance Stochastics.

[37]  S. Ethier,et al.  Markov Processes: Characterization and Convergence , 2005 .

[38]  Ke Wang,et al.  Multi-Period Corporate Default Prediction with Stochastic Covariates , 2005 .

[39]  P. Dupuis,et al.  Importance Sampling, Large Deviations, and Differential Games , 2004 .

[40]  P. Glasserman Tail Approximations for Portfolio Credit Risk , 2004 .

[41]  T. Kurtz,et al.  A stochastic evolution equation arising from the fluctuations of a class of interacting particle systems , 2004 .

[42]  Amir Dembo,et al.  Large portfolio losses , 2002, Finance Stochastics.

[43]  Ke Wang,et al.  Multi-Period Corporate Default Prediction with Stochastic Covariates , 2005 .

[44]  K. Giesecke,et al.  Credit Contagion and Aggregate Losses , 2004 .

[45]  Michael B. Gordy A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules , 2002 .

[46]  P. Spreij,et al.  An analytic approach to credit risk of large corporate bond and loan portfolios , 2001 .

[47]  Amir Dembo,et al.  Large Deviations Techniques and Applications , 1998 .

[48]  Sylvie Méléard,et al.  A Hilbertian approach for fluctuations on the McKean-Vlasov model , 1997 .

[49]  P. Glasserman,et al.  Counterexamples in importance sampling for large deviations probabilities , 1997 .

[50]  J. Sadowsky On Monte Carlo estimation of large deviations probabilities , 1996 .

[51]  J. Duan MAXIMUM LIKELIHOOD ESTIMATION USING PRICE DATA OF THE DERIVATIVE CONTRACT , 1994 .

[52]  N. Krylov,et al.  Stochastic partial differential equations with unbounded coefficients and applications. III , 1990 .

[53]  J. Gärtner On the McKean‐Vlasov Limit for Interacting Diffusions , 1988 .

[54]  M. Freidlin,et al.  Random Perturbations of Dynamical Systems , 1984 .

[55]  Kenneth J. Hochberg,et al.  Wandering Random Measures in the Fleming-Viot Model , 1982 .

[56]  Steven A. Orszag,et al.  CBMS-NSF REGIONAL CONFERENCE SERIES IN APPLIED MATHEMATICS , 1978 .