Stress Testing of Credit Portfolios in Light- and Heavy-Tailed Models

Описание: At the September 11, 2014 Frankfurt, Germany GARP Chapter Meeting, Dr. Natalie Packham gave a presentation on stress testing of credit portfolios.

As the role of stress testing has increased in recent years, it has become more important to understand the behavior of models and model side-effects when stress testing. In a generalized Merton-type credit portfolio setup covering light- and heavy-tailed distributions,

Dr. Packham analyzed asset correlations, default probabilities and default correlations under stress. It turns out that the behavior of these quantities under stress depends on the tail index, a variable describing the degree of tail behavior. In general, correlations and default probabilities are more sensitive to extreme stress in light-tailed models than in heavy-tailed models. The results are used to study the behavior of standard risk measures, such as value-at-risk, expected loss and economic capital under stress.

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