Measuring the diversification of a loan portfolio

Agnès Tourin

International Journal of Bonds and Derivatives, 2020, vol. 4, issue 2, 104-113

Abstract: We analyse the effect of correlations on a portfolio of loans. Building on an earlier idea developed at Moody's (Witt, 2004), we define the diversification score as the number of independent loans in an equivalent credit portfolio with the same expected loss and risk level. We perform Monte Carlo simulations to analyse the applicability of this method for two risk measures, namely value at risk and the expected shortfall.

Keywords: loan portfolio; default correlations; risk measure; value at risk; expected shortfall; diversification; Monte Carlo sampling. (search for similar items in EconPapers)
Date: 2020
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