Severe Loss Probabilities in Portfolio Credit Risk Models
We derive explicit sharp bounds on the distribution of the number of defaults from a pool of obligors with common probability of default and default correlation. These bounds are extremely wide, implying that default probabilities and default correlations only very loosely determine probabilities of severe portfolio losses. Our results quantify and thereby reinforce Gordy’s (2002) statement that “Capital decisions ... depend on higher moments”.
|Date of creation:||Dec 1999|
|Date of revision:||14 Jan 2004|
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- 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.).
- Frey, Rudiger & McNeil, Alexander J., 2002. "VaR and expected shortfall in portfolios of dependent credit risks: Conceptual and practical insights," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1317-1334, July.
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