The loss given default of a low-default portfolio with weak contagion

Li Wei, Zhongyi Yuan

Research output: Contribution to journalArticle

6 Scopus citations

Abstract

In this paper we study the loss given default (LGD) of a low default portfolio (LDP), assuming that there is weak credit contagion among the obligors. We characterize the credit contagion by a Sarmanov dependence structure of the risk factors that drive the obligors' default, where the risk factors are assumed to be heavy tailed. From a new perspective of asymptotic analysis, we derive a limiting distribution for the LGD. As a consequence, an approximation for the entire distribution, in contrast to just the tail behavior, of the LGD is obtained. We show numerical examples to demonstrate the limiting distribution. We also discuss possible applications of the limiting distribution to the calculation of moments and the Value at Risk (VaR) of the LGD.

Original languageEnglish (US)
Pages (from-to)113-123
Number of pages11
JournalInsurance: Mathematics and Economics
Volume66
DOIs
StatePublished - Jan 1 2016

All Science Journal Classification (ASJC) codes

  • Statistics and Probability
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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