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Probability and Computational Finance Seminar
Konstantinos Spiliopoulos
Boston University
Title: Default Clustering in Large Financial Systems

Abstract: The past several years have made clear the need to better understand the behavior of risk in large interconnected financial networks. Interconnections often make a system robust, but they can act as conduits for risk. In this talk, I will present a number of recent results on modelling the dynamics of correlated default events in the financial market. An empirically motivated system of interacting particle system of point processes is introduced and we study how different types of risk, like contagion and exposure to systematic risk, compete and interact in large-scale systems. A law of large numbers for the loss from default is proven and used for approximating the distribution of the loss from default in large, potentially heterogeneous portfolios. Fluctuation analysis and conditional Gaussian approximations of the empirical measure are obtained and are then used to improve the approximations. Lastly, we derive the large deviations principle for the underlying empirical measure, which allows us to capture the tail of the distribution, quantify large portfolio losses and build efficient related Monte Carlo methods. Numerical results illustrate the accuracy of the approximations. The results give insights into how different sources of default correlation interact to generate typical and atypical portfolio losses. This work is partially joint with Kay Giesecke, Justin Sirignano and Richard Sowers.

Date: Monday, October 20, 2014
Time: 5:00 pm
Location: Porter Hall 226C
Submitted by:  Scott Robertson