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Fluctuation Analysis for the Loss from Default

32 Pages Posted: 3 Mar 2013 Last revised: 6 Feb 2014

Konstantinos Spiliopoulos

Brown University - Division of Applied Mathematics

Justin Sirignano

Imperial College London - Department of Mathematics; University of Illinois at Urbana-Champaign

Kay Giesecke

Stanford University - Management Science & Engineering

Date Written: February 5, 2014

Abstract

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

Suggested Citation

Spiliopoulos, Konstantinos and Sirignano, Justin and Giesecke, Kay, Fluctuation Analysis for the Loss from Default (February 5, 2014). Available at SSRN: https://ssrn.com/abstract=2226994 or http://dx.doi.org/10.2139/ssrn.2226994

Konstantinos Spiliopoulos (Contact Author)

Brown University - Division of Applied Mathematics ( email )

Providence, RI 02912
United States

Justin Sirignano

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

HOME PAGE: http://jasirign.github.io

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Kay Giesecke

Stanford University - Management Science & Engineering ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States
(650) 723 9265 (Phone)
(650) 723 1614 (Fax)

HOME PAGE: http://www.stanford.edu/~giesecke/

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