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Fluctuation Analysis for the Loss from Default

by Konstantinos Spiliopoulos of Boston University,
Justin A. Sirignano of Stanford University, and
Kay Giesecke of Stanford University

May 30, 2013

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.

AMS Classification: 60F05, 60F17,60G55.

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