Severe Loss Probabilities in Portfolio Credit Risk Models
16 Pages Posted: 20 Feb 2004
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
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