A Loan Portfolio Model Subject to Random Liabilities and Systemic Jump Risk

Luis Alvarez and Jani Sainio

Papers from arXiv.org

Abstract: We extend the Vasi\v{c}ek loan portfolio model to a setting where liabilities fluctuate randomly and asset values may be subject to systemic jump risk. We derive the probability distribution of the percentage loss of a uniform portfolio and analyze its properties. We find that the impact of liability risk is ambiguous and depends on the correlation between the continuous aggregate factor and the asset-liability ratio as well as on the default intensity. We also find that systemic jump risk has a significant impact on the upper percentiles of the loss distribution and, therefore, on both the VaR-measure as well as on the expected shortfall.

Date: 2010-06
New Economics Papers: this item is included in nep-ban and nep-rmg
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