Large Portfolio Losses

19 Pages Posted: 15 Sep 2002 Last revised: 31 Jul 2022

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Jean-Deominique Deuschel

Technische Universität Berlin (TU Berlin)

Date Written: September 2002

Abstract

This paper 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. The results may be useful in allocating exposure limits, and in allocating risk capital across different lines of business. Assuming that, for a given total loss, the distress caused by the loss is larger if the loss occurs within a smaller time period, we provide a large-deviations estimate of the likelihood that there will exist a sub-period of the future planning period during which a total loss of the critical severity occurs. Under conditions, this calculation is reduced to the calculation of the likelihood of the same sized loss over a fixed initial time interval whose length is a property of the portfolio and the critical loss level.

Suggested Citation

Duffie, James Darrell and Deuschel, Jean-Deominique, Large Portfolio Losses (September 2002). NBER Working Paper No. w9177, Available at SSRN: https://ssrn.com/abstract=330316

James Darrell Duffie (Contact Author)

Stanford University - Graduate School of Business ( email )

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Canadian Derivatives Institute ( email )

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Jean-Deominique Deuschel

Technische Universität Berlin (TU Berlin)

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