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Systemic Risk and Default Clustering for Large Financial Systems

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Large Deviations and Asymptotic Methods in Finance

Part of the book series: Springer Proceedings in Mathematics & Statistics ((PROMS,volume 110))

Abstract

As it is known in the finance risk and macroeconomics literature, risk-sharing in large portfolios may increase the probability of creation of default clusters and of systemic risk. We review recent developments on mathematical and computational tools for the quantification of such phenomena. Limiting analysis such as law of large numbers and central limit theorems allow to approximate the distribution in large systems and study quantities such as the loss distribution in large portfolios. Large deviations analysis allow us to study the tail of the loss distribution and to identify pathways to default clustering. Sensitivity analysis allows to understand the most likely ways in which different effects, such as contagion and systematic risks, combine to lead to large default rates. Such results could give useful insights into how to optimally safeguard against such events.

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Acknowledgments

The author was partially supported by the National Science Foundation (DMS 1312124).

Author information

Authors and Affiliations

  1. Department of Mathematics & Statistics, Boston University, Boston, MA, 02215, USA

    Konstantinos Spiliopoulos

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  1. Konstantinos Spiliopoulos
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Correspondence to Konstantinos Spiliopoulos .

Editor information

Editors and Affiliations

  1. Technische Universität Berlin, Institut für Mathematik, Weierstraß- Institut für Angewandte Analysis und Stochastik, Berlin, Germany

    Peter K. Friz

  2. Department of Mathematics, City University of New York Baruch College, New York, New York, USA

    Jim Gatheral

  3. Department of Mathematics, Ohio University, Athens, Ohio, USA

    Archil Gulisashvili

  4. Department of Mathematics, Imperial College London, London, United Kingdom

    Antoine Jacquier

  5. Department of Mathematics, ETH Zürich, Zürich, Switzerland

    Josef Teichmann

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Spiliopoulos, K. (2015). Systemic Risk and Default Clustering for Large Financial Systems. In: Friz, P., Gatheral, J., Gulisashvili, A., Jacquier, A., Teichmann, J. (eds) Large Deviations and Asymptotic Methods in Finance. Springer Proceedings in Mathematics & Statistics, vol 110. Springer, Cham. https://doi.org/10.1007/978-3-319-11605-1_19

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