Extreme Portfolio Loss Correlations in Credit Risk
The stability of the financial system is associated with systemic risk factors such as the concurrent default of numerous small obligors. Hence, it is of utmost importance to study the mutual dependence of losses for different creditors in the case of large, overlapping credit portfolios. We analyti...
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doaj-91d92432eea84bb8b81a46ce2b64117e2020-11-25T00:07:07ZengMDPI AGRisks2227-90912018-07-01637210.3390/risks6030072risks6030072Extreme Portfolio Loss Correlations in Credit RiskAndreas Mühlbacher0Thomas Guhr1Fakultät für Physik, Universität Duisburg-Essen, Lotharstraße 1, 47048 Duisburg, GermanyFakultät für Physik, Universität Duisburg-Essen, Lotharstraße 1, 47048 Duisburg, GermanyThe stability of the financial system is associated with systemic risk factors such as the concurrent default of numerous small obligors. Hence, it is of utmost importance to study the mutual dependence of losses for different creditors in the case of large, overlapping credit portfolios. We analytically calculate the multivariate joint loss distribution of several credit portfolios on a non-stationary market. To take fluctuating asset correlations into account, we use an random matrix approach which preserves, as a much appreciated side effect, analytical tractability and drastically reduces the number of parameters. We show that, for two disjoint credit portfolios, diversification does not work in a correlated market. Additionally, we find large concurrent portfolio losses to be rather likely. We show that significant correlations of the losses emerge not only for large portfolios with thousands of credit contracts, but also for small portfolios consisting of a few credit contracts only. Furthermore, we include subordination levels, which were established in collateralized debt obligations to protect the more senior tranches from high losses. We analytically corroborate the observation that an extreme loss of the subordinated creditor is likely to also yield a large loss of the senior creditor.http://www.mdpi.com/2227-9091/6/3/72portfolio credit risksystemic riskdiversificationportfolio loss correlationcollateralized debt obligationsnon-stationarity |
collection |
DOAJ |
language |
English |
format |
Article |
sources |
DOAJ |
author |
Andreas Mühlbacher Thomas Guhr |
spellingShingle |
Andreas Mühlbacher Thomas Guhr Extreme Portfolio Loss Correlations in Credit Risk Risks portfolio credit risk systemic risk diversification portfolio loss correlation collateralized debt obligations non-stationarity |
author_facet |
Andreas Mühlbacher Thomas Guhr |
author_sort |
Andreas Mühlbacher |
title |
Extreme Portfolio Loss Correlations in Credit Risk |
title_short |
Extreme Portfolio Loss Correlations in Credit Risk |
title_full |
Extreme Portfolio Loss Correlations in Credit Risk |
title_fullStr |
Extreme Portfolio Loss Correlations in Credit Risk |
title_full_unstemmed |
Extreme Portfolio Loss Correlations in Credit Risk |
title_sort |
extreme portfolio loss correlations in credit risk |
publisher |
MDPI AG |
series |
Risks |
issn |
2227-9091 |
publishDate |
2018-07-01 |
description |
The stability of the financial system is associated with systemic risk factors such as the concurrent default of numerous small obligors. Hence, it is of utmost importance to study the mutual dependence of losses for different creditors in the case of large, overlapping credit portfolios. We analytically calculate the multivariate joint loss distribution of several credit portfolios on a non-stationary market. To take fluctuating asset correlations into account, we use an random matrix approach which preserves, as a much appreciated side effect, analytical tractability and drastically reduces the number of parameters. We show that, for two disjoint credit portfolios, diversification does not work in a correlated market. Additionally, we find large concurrent portfolio losses to be rather likely. We show that significant correlations of the losses emerge not only for large portfolios with thousands of credit contracts, but also for small portfolios consisting of a few credit contracts only. Furthermore, we include subordination levels, which were established in collateralized debt obligations to protect the more senior tranches from high losses. We analytically corroborate the observation that an extreme loss of the subordinated creditor is likely to also yield a large loss of the senior creditor. |
topic |
portfolio credit risk systemic risk diversification portfolio loss correlation collateralized debt obligations non-stationarity |
url |
http://www.mdpi.com/2227-9091/6/3/72 |
work_keys_str_mv |
AT andreasmuhlbacher extremeportfoliolosscorrelationsincreditrisk AT thomasguhr extremeportfoliolosscorrelationsincreditrisk |
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1725419933313007616 |