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

23 Pages Posted: 3 Apr 2003

See all articles by Philipp Schönbucher

Philipp Schönbucher

ETH Zürich - Department of Mathematics

Date Written: 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 (the CreditMetrics 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. This allows us to study the effects of different specifications of the dependency structure on the overall portfolio default risk and in particular on the tail risk of the credit portfolio.

Keywords: credit risk, default correlation, CreditMetrics, copula functions

JEL Classification: G13, G33

Suggested Citation

Schönbucher, Philipp J., Taken to the Limit: Simple and Not-so-Simple Loan Loss Distributions (August 2002). Available at SSRN: https://ssrn.com/abstract=378640 or http://dx.doi.org/10.2139/ssrn.378640

Philipp J. Schönbucher (Contact Author)

ETH Zürich - Department of Mathematics ( email )

ETH Zentrum HG-F 42.1
Raemistr. 101
CH-8092 Zurich, 8092
Switzerland
+41 1 6326409 (Phone)

HOME PAGE: http://www.schonbucher.de

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