8. Credit Portfolio Risk and Diversification

  1. Daniel Rösch and
  2. Harald Scheule
  1. Rudi Schäfer1,
  2. Alexander F. R. Koivusalo2 and
  3. Thomas Guhr1

Published Online: 29 AUG 2013

DOI: 10.1002/9781118818503.ch8

Credit Securitizations and Derivatives: Challenges for the Global Markets

Credit Securitizations and Derivatives: Challenges for the Global Markets

How to Cite

Schäfer, R., Koivusalo, A. F. R. and Guhr, T. (2013) Credit Portfolio Risk and Diversification, in Credit Securitizations and Derivatives: Challenges for the Global Markets (eds D. Rösch and H. Scheule), John Wiley & Sons Ltd, Chichester, UK. doi: 10.1002/9781118818503.ch8

Author Information

  1. 1

    University of Duisburg-Essen

  2. 2

    Koivusalo Capital, Malmö

Publication History

  1. Published Online: 29 AUG 2013
  2. Published Print: 12 APR 2013

ISBN Information

Print ISBN: 9781119963967

Online ISBN: 9781118818503

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Keywords:

  • correlated asset values;
  • correlated GARCH processes;
  • credit portfolio diversification;
  • independent asset value processes;
  • large portfolio limit;
  • Merton model;
  • model setup;
  • portfolio credit risk

Summary

The present financial crisis illustrates in a dramatic fashion that a deeper understanding of portfolio credit risk is needed. Diversification has only a very limited effect on the tail risk of credit portfolios. This chapter presents a short introduction to the Merton model. It considers the case of independent asset value processes. The chapter also presents Monte Carlo results for correlated diffusion processes. It discusses the dependence of tail risk on correlation strength and portfolio size. In the chapter, the diffusion case is treated analytically in the large portfolio limit, and the results to Monte Carlo simulations of finite portfolios are compared. It finally provides numerical results for correlated GARCH processes, and describes the applicability of the structural recovery rate beyond the Merton model.