Portfolio Credit Risk with Extremal Dependence: Asymptotic Analysis and Efficient Simulation

We consider the risk of a portfolio comprised of loans, bonds, and financial instruments that are subject to possible default. In particular, we are interested in performance measures such as the probability that the portfolio incurs large losses over a fixed time horizon and the expected excess loss given that large losses are incurred during this horizon. Contrary to the normal copula that is commonly used in practice (e.g., in the CreditMetrics system), we assume a portfolio dependence structure that is semiparametric, does not hinge solely on correlation, and supports extremal dependence among obligors. A particular instance within the proposed class of models is the so-called t-copula model that is derived from the multivariate Student t distribution and hence generalizes the normal copula model. The size of the portfolio, the heterogenous mix of obligors, and the fact that default events are rare and mutually dependent makes it quite complicated to calculate portfolio credit ris...

• Type: Journal
• Year: 2008
• Where: IOR
• Authors: Achal Bassamboo, Sandeep Juneja, Assaf J. Zeevi
• Keywords: IOR 2008, Large Losses, Normal Copula, Portfolio Credit Risk