TY - JOUR
T1 - The loss given default of a low-default portfolio with weak contagion
AU - Wei, Li
AU - Yuan, Zhongyi
N1 - Funding Information:
The authors would like to thank Professor Xiaojun Shi at Renmin University of China and Professor Qihe Tang at University of Iowa for valuable discussions. Wei acknowledges the support by Program for New Century Excellent Talents in University (Grant No. NCET-12-0535 ).
Publisher Copyright:
© 2015 Elsevier B.V.
PY - 2016/1/1
Y1 - 2016/1/1
N2 - 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.
AB - 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.
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U2 - 10.1016/j.insmatheco.2015.10.005
DO - 10.1016/j.insmatheco.2015.10.005
M3 - Article
AN - SCOPUS:84949505826
SN - 0167-6687
VL - 66
SP - 113
EP - 123
JO - Insurance: Mathematics and Economics
JF - Insurance: Mathematics and Economics
ER -