Taken to the Limit: Simple and Not-so-simple Loan Loss Distributions

by Philipp J. Schönbucher of Bonn University

August 2002

Abstract: Formulae for the distribution of the losses of a loan portfolio that are both realistic and simple enough to be implemented in a spreadsheet are hard to come by. The most prominent example is the Vasicek (1987) formula which is based upon a simplified version of the multivariate Merton (1974) model. Using an algorithm from the theory of Archimedean Copula functions, this paper gives some more limiting loss distributions which are driven by random variables with different dependency structures.

JEL Classification: G13.

Keywords: Copula functions, credit risk, credit portfolio models.

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