Fluctuation Analysis for the Loss from Default
32 Pages Posted: 3 Mar 2013 Last revised: 6 Feb 2014
Date Written: February 5, 2014
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.
Keywords: CLT, fluctuations analysis, portfolio loss, risk management, approximation
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