Extreme Tails for Linear Portfolio Credit Risk Models
by André Lucas of the Tinbergen Institute Amsterdam,
Abstract: We consider the extreme tail behavior of the CreditMetrics model for portfolio credit losses. We generalize the model to allow for alter-native distributions of the risk factors. We consider two special cases and provide alternative tail approximations. The results reveal that one has to be careful in applying extreme value theory for computing extreme quantiles efficiently. The applicability of extreme value theory in characterizing the tail shape very much depends on the exact distributional assumptions for the systematic and idiosyncratic credit risk factors.
Keywords: portfolio credit risk, extreme value theory, tail events, tail index, CreditMetrics, second and higher order expansions.
Published in: Risk Measurement and Systemic Risk, (March 2002), pp. 271-283, Bank of International Settlements: Basel.