Severe Loss Probabilities in Portfolio Credit Risk Models

Babbs, Simon H.; Johnson, Andrew

doi:10.2139/ssrn.504282

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Severe Loss Probabilities in Portfolio Credit Risk Models

16 Pages Posted: 20 Feb 2004

See all articles by Simon H. Babbs

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: 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