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A Loan Portfolio Model Subject to Random Liabilities and Systemic Jump Risk

  • Luis H. R. Alvarez
  • Jani Sainio

We extend the Vasi\v{c}ek loan portfolio model to a setting where liabilities fluctuate randomly and asset values may be subject to systemic jump risk. We derive the probability distribution of the percentage loss of a uniform portfolio and analyze its properties. We find that the impact of liability risk is ambiguous and depends on the correlation between the continuous aggregate factor and the asset-liability ratio as well as on the default intensity. We also find that systemic jump risk has a significant impact on the upper percentiles of the loss distribution and, therefore, on both the VaR-measure as well as on the expected shortfall.

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File URL: http://arxiv.org/pdf/1006.0863
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Paper provided by arXiv.org in its series Papers with number 1006.0863.

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Date of creation: Jun 2010
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Handle: RePEc:arx:papers:1006.0863
Contact details of provider: Web page: http://arxiv.org/

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," NBER Working Papers 13761, National Bureau of Economic Research, Inc.
  2. Chunsheng Zhou, 1997. "A jump-diffusion approach to modeling credit risk and valuing defaultable securities," Finance and Economics Discussion Series 1997-15, Board of Governors of the Federal Reserve System (U.S.).
  3. de Andrade, Fabio Wendling Muniz & Thomas, Lyn, 2007. "Structural models in consumer credit," European Journal of Operational Research, Elsevier, vol. 183(3), pages 1569-1581, December.
  4. Zhou, Chunsheng, 2001. "The term structure of credit spreads with jump risk," Journal of Banking & Finance, Elsevier, vol. 25(11), pages 2015-2040, November.
  5. Reinhart, Carmen M. & Rogoff, Kenneth S., 2009. "The Aftermath of Financial Crises," Scholarly Articles 11129155, Harvard University Department of Economics.
  6. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
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