Severe Loss Probabilities in Portfolio Credit Risk Models

16 Pages Posted: 20 Feb 2004

See all articles by Simon H. Babbs

Simon H. Babbs

The Options Clearing Corporation

Andrew Johnson

Curtin University

Date Written: January 9, 2004

Abstract

We derive explicit sharp bounds on the distribution of the number of defaults from a pool of obligors with common probability of default and default correlation. These bounds are extremely wide, implying that default probabilities and default correlations only very loosely determine estimates of severe portfolio losses. Our results quantify and thereby reinforce Gordy's (2002) statement that "Capital decisions . . . depend on higher moments".

Keywords: Portfolio, credit, risk, models,default, loss, probabilities, severe

JEL Classification: G31, C16, G11

Suggested Citation

Babbs, Simon H. and Johnson, Andrew, Severe Loss Probabilities in Portfolio Credit Risk Models (January 9, 2004). Available at SSRN: https://ssrn.com/abstract=504282 or http://dx.doi.org/10.2139/ssrn.504282

Simon H. Babbs (Contact Author)

The Options Clearing Corporation ( email )

1 N. Wacker Drive
Chicago, IL 60606
United States
312 322 6288 (Phone)
312 322 4442 (Fax)

Andrew Johnson

Curtin University ( email )

Kent Street
Bentley
Perth, WA WA 6102
Australia