A limit distribution of credit portfolio losses with low default probabilities

Xiaojun Shi, Qihe Tang and Zhongyi Yuan

Insurance: Mathematics and Economics, 2017, vol. 73, issue C, 156-167

Abstract: This paper employs a multivariate extreme value theory (EVT) approach to study the limit distribution of the loss of a general credit portfolio with low default probabilities. A latent variable model is employed to quantify the credit portfolio loss, where both heavy tails and tail dependence of the latent variables are realized via a multivariate regular variation (MRV) structure. An approximation formula to implement our main result numerically is obtained. Intensive simulation experiments are conducted, showing that this approximation formula is accurate for relatively small default probabilities, and that our approach is superior to a copula-based approach in reducing model risk.

Keywords: Credit portfolio loss; Extreme risk; Limit distribution; Loss given default; Model risk; Multivariate regular variation; Tail dependence (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:73:y:2017:i:c:p:156-167

DOI: 10.1016/j.insmatheco.2017.02.003

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