  We study large deviations and rare default clustering events in a dynamic
large heterogeneous portfolio of interconnected components. Defaults come as
Poisson events and the default intensities of the different components in the
system interact through the empirical default rate and via systematic effects
that are common to all components. We establish the large deviations principle
for the empirical default rate for such an interacting particle system. The
rate function is derived in an explicit form that is amenable to numerical
computations and derivation of the most likely path to failure for the system
itself. Numerical studies illustrate the theoretical findings. An understanding
of the role of the preferred paths to large default rates and the most likely
ways in which contagion and systematic risk combine to lead to large default
rates would give useful insights into how to optimally safeguard against such
events.
