Large portfolio losses
The authors provide a large-deviations approximation of the tail distribution of total financial losses on a portfolio consisting of many positions. Applications include the total default losses on a bank portfolio, or the total claims against an insurer. A key assumption is that, conditional on a common ``correlating'' factor \(Y\), position losses are independent. The results include explicit calculations, conditional on a large portfolio loss, of the probability of loss for each position, and the distribution of the size of the position loss. The authors receive conditions under which a large-deviation estimate of the likelihood of a failure-threatening loss during some sub-interval of time during given planning horizon can be calculated from the likelihood of the same size loss in a certain fixed ``key time horizon''.
scientific article; zbMATH DE number 2118686