Expected shortfall in credit portfolios with extremal dependence

We consider the risk of a portfolio comprised of loans, bonds, and financial instruments that are subject to possible default. We are interested in efficiently estimating expected excess loss conditioned on the event that the portfolio incurs large losses over a fixed time horizon; this risk measure...

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Bibliographic Details
Published in:Proceedings of the Winter Simulation Conference, 2005 p. 10 pp.
Main Authors: Bassamboo, A., Juneja, S., Zeevi, A.
Format: Conference Proceeding
Language:English
Published: IEEE 2005
Subjects:
Computer science
Context modeling
Fasteners
Instruments
Loss measurement
Monte Carlo methods
Portfolios
Random variables
Risk management
Time measurement
ISBN:0780395190, 9780780395190
ISSN:0891-7736
Online Access:Get full text
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Summary:We consider the risk of a portfolio comprised of loans, bonds, and financial instruments that are subject to possible default. We are interested in efficiently estimating expected excess loss conditioned on the event that the portfolio incurs large losses over a fixed time horizon; this risk measure is often referred to as expected shortfall. We consider a heterogeneous mix of obligors and assume a portfolio dependence structure that supports extremal dependence among obligors and does not hinge solely on correlation. We first derive sharp asymptotics that illustrate the implications of extremal dependence among obligors in the risk of the portfolio. Using this as a stepping stone, we develop a multistage importance sampling algorithm that is shown to have bounded relative error in estimating expected shortfall.
ISBN:0780395190
9780780395190
ISSN:0891-7736
DOI:10.1109/WSC.2005.1574461