Tail behaviour of credit loss distributions for general latent factor models
Using a limiting approach to portfolio credit risk, we obtain analytic expressions for the tail behavior of credit losses. To capture the co-movements in defaults over time, we assume that defaults are triggered by a general, possibly non-linear, factor model involving both systematic and idiosyncratic risk factors. The model encompasses default mechanisms in popular models of portfolio credit risk, such as CreditMetrics and CreditRisk+. We show how the tail characteristics of portfolio credit losses depend directly upon the factor model's functional form and the tail properties of the model's risk factors. In many cases the credit loss distribution has a polynomial (rather than exponential) tail. This feature is robust to changes in tail characteristics of the underlying risk factors. Finally, we show that the interaction between portfolio quality and credit loss tail behavior is strikingly different between the CreditMetrics and CreditRisk+ approach to modeling portfolio credit risk.
Volume (Year): 10 (2003)
Issue (Month): 4 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAMF20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAMF20|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bangia, Anil & Diebold, Francis X. & Kronimus, Andre & Schagen, Christian & Schuermann, Til, 2002.
"Ratings migration and the business cycle, with application to credit portfolio stress testing,"
Journal of Banking & Finance,
Elsevier, vol. 26(2-3), pages 445-474, March.
- Anil Bangia & Francis X. Diebold & Til Schuermann, 2000. "Ratings Migration and the Business Cycle, With Application to Credit Portfolio Stress Testing," Center for Financial Institutions Working Papers 00-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Lucas, Andre & Klaassen, Pieter & Spreij, Peter & Straetmans, Stefan, 2001.
"An analytic approach to credit risk of large corporate bond and loan portfolios,"
Journal of Banking & Finance,
Elsevier, vol. 25(9), pages 1635-1664, September.
- Lucas, André & Klaassen, Pieter & Spreij, Peter, 1999. "An analytic approach to credit risk of large corporate bond and loan portfolios," Serie Research Memoranda 0018, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
- Mark Carey, 1998. "Credit Risk in Private Debt Portfolios," Journal of Finance, American Finance Association, vol. 53(4), pages 1363-1387, 08.
- Michael B. Gordy, 1998.
"A comparative anatomy of credit risk models,"
Finance and Economics Discussion Series
1998-47, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:10:y:2003:i:4:p:337-357. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.