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.
Highlights
Credit portfolios play a crucial role in the economy and numerous approaches and ideas have been put forward to model the losses that might occur to the portfolio holder, see eg [1], [2], [3], [4], [5], [6]
We show that, when looking at larger time intervals, the resulting fluctuating correlation and covariance matrices form a truly existing, non-fictitious ensemble which can very well be modeled by a random matrix ensemble
The financial system was affected on all scales, avalanche and herding effects set in which changed the financial system to the present
Summary
OPEN ACCESS Citation: Sicking J, Guhr T, Schafer R (2018) Concurrent credit portfolio losses. Finance (https://finance.yahoo.com/) can be found in the S1 Appendix file. In order to explore the full statistical dependence structure of such portfolio losses, we estimate their empirical pairwise 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 reveal that large portfolios of thousands of contracts, and 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 for investors in structured fixed-income products, but for the stability of the financial sector.
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