TY - JOUR
T1 - VaR and expected shortfall in portfolios of dependent credit risks
T2 - Conceptual and practical insights
AU - Frey, Rüdiger
AU - McNeil, Alexander J.
PY - 2002
Y1 - 2002
N2 - In the first part of this paper we address the non-coherence of value-at-risk (VaR) as a risk measure in the context of portfolio credit risk, and highlight some problems which follow from this theoretical deficiency. In particular, a realistic demonstration of the non-subadditivity of VaR is given and the possibly nonsensical consequences of VaR-based portfolio optimisation are shown. The second part of the paper discusses VaR and expected shortfall estimation for large balanced credit portfolios. All standard industry models (Creditmetrics, KMV, Credit-Risk
+) are presented as Bernoulli mixture models to facilitate their direct comparison. For homogeneous groups it is shown that measures of tail risk for the loss distribution may be approximated in large portfolios by analysing the tail of the mixture distribution in the Bernoulli representation. An example is given showing that, for portfolios of lower quality, choice of model has some impact on measures of extreme risk.
AB - In the first part of this paper we address the non-coherence of value-at-risk (VaR) as a risk measure in the context of portfolio credit risk, and highlight some problems which follow from this theoretical deficiency. In particular, a realistic demonstration of the non-subadditivity of VaR is given and the possibly nonsensical consequences of VaR-based portfolio optimisation are shown. The second part of the paper discusses VaR and expected shortfall estimation for large balanced credit portfolios. All standard industry models (Creditmetrics, KMV, Credit-Risk
+) are presented as Bernoulli mixture models to facilitate their direct comparison. For homogeneous groups it is shown that measures of tail risk for the loss distribution may be approximated in large portfolios by analysing the tail of the mixture distribution in the Bernoulli representation. An example is given showing that, for portfolios of lower quality, choice of model has some impact on measures of extreme risk.
KW - Bernoulli mixture models
KW - Coherence
KW - Expected shortfall
KW - Portfolio credit risk models
KW - Risk measures
KW - Value-at-risk
UR - http://www.scopus.com/inward/record.url?scp=0036071622&partnerID=8YFLogxK
U2 - 10.1016/S0378-4266(02)00265-0
DO - 10.1016/S0378-4266(02)00265-0
M3 - Article
AN - SCOPUS:0036071622
SN - 0378-4266
VL - 26
SP - 1317
EP - 1334
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
IS - 7
ER -