October 2024
Intermediate to advanced
432 pages
16h 57m
English
Content preview from Contemporary Finance
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13Portfolio Credit Risk
Chapter 9 summarized the legal and institutional nature of credit risk and introduced models of the timing and probability of default of a single borrower. In practice, credit risk is concerned with losses in portfolios of loan or bonds with many different obligors. A US regional bank will have a loan book on the order of $100 billion outstanding, and banks and investment managers can easily have have bond investment portfolios that size or much larger.
The most important elements of credit risk can only be understood in a portfolio framework. Credit risk is driven not only by the likelihood of default but also by the likelihood that a surprising number of defaults will coincide. The average loan in a credit portfolio could have a relatively low default rate, but the portfolio can experience greater than expected losses if many loans default simultaneously.
A common metric for portfolio credit risk is its credit Value-at-Risk (VaR). For a given confidence level 
, it is the 
-quantile of the portfolio’s unexpected credit loss distribution over a given time horizon, the loss the manager can plausibly state will be exceeded with a probability of only 
. Credit ...
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