7 Stable modeling of portfolio risk for symmetric dependent credit returns

In this section we suppose that distributions of credit returns are symmetric α-stable and dependent. We interpret a symmetric random variable as a transformation of a normal random variable. Based on this interpretation, we develop a new methodology for correlation estimation. We apply the methodology for portfolio risk assessment.

We evaluate portfolio risk by determining portfolio VaR: (i) simulating a distribution of the RP=i=1nwiRisi240_e values; (ii) finding a certain quantile of the RP distribution, say, the 1% quantile, which corresponds to the 99% VaR confidence level. ...

Get Handbook of Heavy Tailed Distributions in Finance now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.