Concurrent Credit Portfolio Losses
Abstract
We consider the problem of concurrent portfolio losses in two non-overlapping credit portfolios. In order to explore the full statistical dependence structure of such portfolio losses, we estimate their empirical pairwise copulas. Instead of a Gaussian dependence, we typically find a strong asymmetry in the copulas. Concurrent large portfolio losses are much more likely than small ones. Studying the dependences of these losses as a function of portfolio size, we moreover reveal that not only large portfolios of thousands of contracts, but also medium-sized and small ones with only a few dozens of contracts exhibit notable portfolio loss correlations. Anticipated idiosyncratic effects turn out to be negligible. These are troublesome insights not only for investors in structured fixed-income products, but particularly for the stability of the financial sector.
Keywords
Cite
@article{arxiv.1604.06917,
title = {Concurrent Credit Portfolio Losses},
author = {Joachim Sicking and Thomas Guhr and Rudi Schäfer},
journal= {arXiv preprint arXiv:1604.06917},
year = {2017}
}