An Analysis of Private Loan Guarantee Portfolios

35 Pages Posted: 19 Jun 2002 Last revised: 15 May 2015

See all articles by M. Michel Gendron

M. Michel Gendron

Université Laval - Département de Finance et Assurance

Van Son Lai

Université Laval

Issouf Soumaré

Laval University

Abstract

We use contingent claims analysis to evaluate portfolios of vulnerable private loan guarantees and to investigate their risk diversification properties. We find that for plausible baseline values of the parameters, the diversifiable credit risk can be eliminated in a portfolio of ten insured firms. We also show that further diversification can be achieved by an appropriate choice of insured firms' risk postures and of correlations between them and the guarantor. Our results suggest that, for high leverage cases, guarantors can do better through size portfolio diversification than by seeking cross-sector diversification.

JEL Classification: G11, G13, G22

Suggested Citation

Gendron, M. Michel and Lai, Van Son and Soumaré, Issouf, An Analysis of Private Loan Guarantee Portfolios. EFMA 2002 London Meetings ; Journal of Fixed Income, Vol. 16, No. 1, 2006, pp. 55-64. Available at SSRN: https://ssrn.com/abstract=314386 or http://dx.doi.org/10.2139/ssrn.314386

M. Michel Gendron

Université Laval - Département de Finance et Assurance ( email )

Pavillon Palasis-Prince
Quebec G1K 7P4
Canada
418-656-2131 Ext: 7380 (Phone)
418-656-2624 (Fax)

HOME PAGE: http://www3.fsa.ulaval.ca/dept/fas/gendron.html

Van Son Lai (Contact Author)

Université Laval ( email )

FSA ULaval
Quebec G1V 0A6
Canada
418-656-2131, x3943 (Phone)

Issouf Soumaré

Laval University ( email )

Faculty of Business Administration
Department of Finance, Insurance and Real Estate
Quebec, Quebec G1V 0A6
Canada
1418 656 3423 (Phone)
1418 656 2624 (Fax)

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