Expected shortfall in credit portfolios with extremal dependence

Achal Bassamboo; Sandeep Juneja; Assaf Zeevi

doi:10.1109/WSC.2005.1574461

Expected shortfall in credit portfolios with extremal dependence

Achal Bassamboo^*, Sandeep Juneja, Assaf Zeevi

^*Corresponding author for this work

Managerial Economics, Decision Sciences and Operations

Research output: Chapter in Book/Report/Conference proceeding › Conference contribution

4 Scopus citations

Abstract

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 multi-stage importance sampling algorithm that is shown to have bounded relative error in estimating expected shortfall.

Original language	English (US)
Title of host publication	Proceedings of the 2005 Winter Simulation Conference
Pages	1849-1858
Number of pages	10
DOIs	https://doi.org/10.1109/WSC.2005.1574461
State	Published - 2005
Event	2005 Winter Simulation Conference - Orlando, FL, United States Duration: Dec 4 2005 → Dec 7 2005

Publication series

Name	Proceedings - Winter Simulation Conference
Volume	2005
ISSN (Print)	0891-7736

Other

Other	2005 Winter Simulation Conference
Country/Territory	United States
City	Orlando, FL
Period	12/4/05 → 12/7/05

ASJC Scopus subject areas

Software
Modeling and Simulation
Computer Science Applications

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10.1109/WSC.2005.1574461

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abstract = "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 multi-stage importance sampling algorithm that is shown to have bounded relative error in estimating expected shortfall.",

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doi = "10.1109/WSC.2005.1574461",

language = "English (US)",

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T1 - Expected shortfall in credit portfolios with extremal dependence

AU - Bassamboo, Achal

AU - Juneja, Sandeep

AU - Zeevi, Assaf

PY - 2005

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N2 - 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 multi-stage importance sampling algorithm that is shown to have bounded relative error in estimating expected shortfall.

AB - 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 multi-stage importance sampling algorithm that is shown to have bounded relative error in estimating expected shortfall.

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DO - 10.1109/WSC.2005.1574461

M3 - Conference contribution

AN - SCOPUS:33846695226

SN - 0780395204

SN - 9780780395206

T3 - Proceedings - Winter Simulation Conference

SP - 1849

EP - 1858

BT - Proceedings of the 2005 Winter Simulation Conference

T2 - 2005 Winter Simulation Conference

Y2 - 4 December 2005 through 7 December 2005

ER -

Expected shortfall in credit portfolios with extremal dependence

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