Sample-Path Large Deviations in Credit Risk
The event of large losses plays an important role in credit risk. As these large losses are typically rare, and portfolios usually consist of a large number of positions, large deviation theory is the natural tool to analyze the tail asymptotics of the probabilities involved. We first derive a sampl...
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| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
| Published: |
Wiley
2011-01-01
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| Series: | Journal of Applied Mathematics |
| Online Access: | http://dx.doi.org/10.1155/2011/354171 |
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| Summary: | The event of large losses plays an important role in credit risk. As these large losses are
typically rare, and portfolios usually consist of a large number of positions, large deviation theory is
the natural tool to analyze the tail asymptotics of the probabilities involved. We first derive a sample-path
large deviation principle (LDP) for the portfolio's loss process, which enables the computation
of the logarithmic decay rate of the probabilities of interest. In addition, we derive exact asymptotic
results for a number of specific rare-event probabilities, such as the probability of the loss process
exceeding some given function. |
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| ISSN: | 1110-757X 1687-0042 |