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Register a new userLarge portfolio losses: A dynamic contagion model
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Added by
Marco Tolotti Dr.
Publication date
2009
fields
Financial
and research's language is
English
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Using particle system methodologies we study the propagation of financial distress in a network of firms facing credit risk. We investigate the phenomenon of a credit crisis and quantify the losses that a bank may suffer in a large credit portfolio. Applying a large deviation principle we compute the limiting distributions of the system and determine the time evolution of the credit quality indicators of the firms, deriving moreover the dynamics of a global financial health indicator. We finally describe a suitable version of the Central Limit Theorem useful to study large portfolio losses. Simulation results are provided as well as applications to portfolio loss distribution analysis.
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We extend the classical risk minimization model with scalar risk measures to the general case of set-valued risk measures. The problem we obtain is a set-valued optimization model and we propose a goal programming-based approach with satisfaction function to obtain a solution which represents the best compromise between goals and the achievement levels. Numerical examples are provided to illustrate how the method works in practical situations.
Propagation of balance-sheet or cash-flow insolvency across financial institutions may be modeled as a cascade process on a network representing their mutual exposures. We derive rigorous asymptotic results for the magnitude of contagion in a large financial network and give an analytical expression for the asymptotic fraction of defaults, in terms of network characteristics. Our results extend previous studies on contagion in random graphs to inhomogeneous directed graphs with a given degree sequence and arbitrary distribution of weights. We introduce a criterion for the resilience of a large financial network to the insolvency of a small group of financial institutions and quantify how contagion amplifies small shocks to the network. Our results emphasize the role played by contagious links and show that institutions which contribute most to network instability in case of default have both large connectivity and a large fraction of contagious links. The asymptotic results show good agreement with simulations for networks with realistic sizes.
This paper gives an overview of the theory of dynamic convex risk measures for random variables in discrete time setting. We summarize robust representation results of conditional convex risk measures, and we characterize various time consistency properties of dynamic risk measures in terms of acceptance sets, penalty functions, and by supermartingale properties of risk processes and penalty functions.
This paper approaches the definition and properties of dynamic convex risk measures through the notion of a family of concave valuation operators satisfying certain simple and credible axioms. Exploring these in the simplest context of a finite time set and finite sample space, we find natural risk-transfer and time-consistency properties for a firm seeking to spread its risk across a group of subsidiaries.
We consider an SIR-type (Susceptible $to$ Infected $to$ Recovered) stochastic epidemic process with multiple modes of transmission on a contact network. The network is given by a random graph following a multilayer configuration model where edges in different layers correspond to potentially infectious contacts of different types. We assume that the graph structure evolves in response to the epidemic via activation or deactivation of edges. We derive a large graph limit theorem that gives a system of ordinary differential equations (ODEs) describing the evolution of quantities of interest, such as the proportions of infected and susceptible vertices, as the number of nodes tends to infinity. Analysis of the limiting system elucidates how the coupling of edge activation and deactivation to infection status affects disease dynamics, as illustrated by a two-layer network example with edge types corresponding to community and healthcare contacts. Our theorem extends some earlier results deriving the deterministic limit of stochastic SIR processes on static, single-layer configuration model graphs. We also describe precisely the conditions for equivalence between our limiting ODEs and the systems obtained via pair approximation, which are widely used in the epidemiological and ecological literature to approximate disease dynamics on networks. Potential applications include modeling Ebola dynamics in West Africa, which was the motivation for this study.
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