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A hierarchical Archimedean copula for portfolio credit risk modelling

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  • Puzanova, Natalia
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    Abstract

    I introduce a novel, hierarchical model of tail dependent asset returns which can be particularly useful for measuring portfolio credit risk within the structural framework. To allow for a stronger dependence within sub-portfolios than between them, I utilise the concept of nested Archimedean copulas, but modify the nesting procedure to ensure the compatibility of copula generators by construction. This makes sampling straightforward. Moreover, I provide details on a particular specification based on a gamma mixture of powers. This model allows for lower tail dependence, resulting in a more conservative credit risk assessment than a comparable Gaussian model. I illustrate the extent of model risk when calculating VaR or Expected Shortfall for a credit portfolio. --

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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2011,14.

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    Date of creation: 2011
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    Handle: RePEc:zbw:bubdp2:201114

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    Keywords: portfolio credit risk; nested Archimedean copula; tail dependence; hierarchical dependence structure;

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    Cited by:
    1. Segers, Johan & Uyttendaele, Nathan, 2014. "Nonparametric estimation of the tree structure of a nested Archimedean copula," Computational Statistics & Data Analysis, Elsevier, vol. 72(C), pages 190-204.

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