Severe Loss Probabilities in Portfolio Credit Risk Models

Simon H Babbs and Andrew E Johnson

MPRA Paper from University Library of Munich, Germany

Abstract: We derive explicit sharp bounds on the distribution of the number of defaults from a pool of obligors with common probability of default and default correlation. These bounds are extremely wide, implying that default probabilities and default correlations only very loosely determine probabilities of severe portfolio losses. Our results quantify and thereby reinforce Gordy’s (2002) statement that “Capital decisions ... depend on higher moments”.

Keywords: Portfolio; Credit; Risk; Models (search for similar items in EconPapers)
JEL-codes: C16 G11 G31 (search for similar items in EconPapers)
Date: 1999-12, Revised 2004-01-14
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:22929

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