Concurrent credit portfolio losses

Joachim Sicking, Thomas Guhr and Rudi Schäfer

PLOS ONE, 2018, vol. 13, issue 2, 1-20

Abstract: We consider the problem of concurrent portfolio losses in two non-overlapping credit portfolios. In order to explore the full statistical dependence structure of such portfolio losses, we estimate their empirical pairwise copulas. Instead of a Gaussian dependence, we typically find a strong asymmetry in the copulas. Concurrent large portfolio losses are much more likely than small ones. Studying the dependences of these losses as a function of portfolio size, we moreover reveal that not only large portfolios of thousands of contracts, but also medium-sized and small ones with only a few dozens of contracts exhibit notable portfolio loss correlations. Anticipated idiosyncratic effects turn out to be negligible. These are troublesome insights not only for investors in structured fixed-income products, but particularly for the stability of the financial sector.JEL codes: C32, F34, G21, G32, H81.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0190263

DOI: 10.1371/journal.pone.0190263

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