Primary-Firm-Driven Portfolio Loss

20 Pages Posted: 23 Jun 2017

See all articles by Stuart M. Turnbull

Stuart M. Turnbull

University of Houston - C.T. Bauer College of Business

Date Written: June 23, 2017

Abstract

Many financial institutions provide loans to secondary firms, whose economic survival depends on the economic condition of primary firms. Even if loans from primary firms are not held in the loan portfolio, the financial distress of primary firms can adversely affect the loan portfolio of a financial institution. This paper describes a simple model that can be used for risk management. Our model directly incorporates the dependence of the conditional probability of default and loss given default of secondary firms on primary firms. Two simple examples show that failure to account for such dependence can result in the value-at-risk and the expected shortfall being greatly underestimated.

Keywords: Primary and Secondary Firms, Gaussian Latent-Factor Model, Expected Loss, Value-At-Risk (VaR), Expected Shortfall (ES)

Suggested Citation

Turnbull, Stuart M., Primary-Firm-Driven Portfolio Loss (June 23, 2017). Journal of Credit Risk, Vol. 13, No. 2, 2017. Available at SSRN: https://ssrn.com/abstract=2991533

Stuart M. Turnbull (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

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