Tail Approximation for Credit Risk Portfolios with Heavy-tailed Risk Factors

DefaultRisk.com the web's biggest credit risk modeling resource.

Submit Your Paper

Post Your Résumé

For Recruiters

Amazon.com Widgets

Tail Approximation for Credit Risk Portfolios with Heavy-tailed Risk Factors

by Krassimir Kostadinov of the Munich University of Technology

January 2005

Abstract: We consider a portfolio credit risk model in the spirit of CreditMetrics. The multivariate normally distributed underlying risk factors in that model are replaced by more general multivariate elliptical factors with heavy-tailed marginals, introducing tail-dependence. We consider a full-scale version of the model, i.e. we incorporate not only the default risk, but also rating migrations, credit spread volatility and recovery risk.

We derive an upper bound of the portfolio loss distribution, which is particularly accurate at high loss levels. Given the complexity of our model, we obtain this results using a mixture of analytic techniques and Monte Carlo simulation. We conclude with an approximation of VaR and a new method to determine the contributions of the individual credits to the overall portfolio risk.

JEL Classification: G11, G21.

Keywords: risk contributions, portfolio credit risk, stock. approximation, tail dependence.

AMS Classification: 62H99, 65C20, 91B28.

Published in: Journal of Risk, Vol. 8, No. 2, (Winter 2006), pp. 81-107.

Books Referenced in this Paper: (what is this?)