Cyclical correlations, credit contagion, and portfolio losses |
| |
Authors: | Kay Giesecke Stefan Weber |
| |
Affiliation: | a School of Operations Research and Industrial Engineering, Cornell University, Ithaca, NY 14853-3801, USA;b Department of Mathematics (SFB 373/Ziegelstraße 13A), Humboldt-Universität zu Berlin, Unter den Linden 6, 10099, Berlin, Germany |
| |
Abstract: | We model aggregate credit losses on large portfolios of financial positions contracted with firms subject to both cyclical default correlation and direct default contagion processes. Cyclical correlation is due to the dependence of firms on common economic factors. Contagion is associated with the local interaction of firms with their business partners. We provide an explicit normal approximation of the distribution of portfolio losses. We quantify the relation between the variability of global economic fundamentals, strength of local firm interaction, and the fluctuation of losses. We find that cyclical oscillations in fundamentals dominate average losses, while local interaction causes additional fluctuations of losses around their average. The strength of the contagion-induced loss variability depends on the complexity of the business partner network. |
| |
Keywords: | Cyclical correlation Credit contagion Portfolio losses Bernoulli mixture model |
本文献已被 ScienceDirect 等数据库收录! |
|