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Title:A hierarchical Archimedean copula for portfolio credit risk modelling PDF Logo
Authors:Puzanova, Natalia
Issue Date:2011
Series/Report no.:Discussion Paper Series 2: Banking and Financial Studies 2011,14
Abstract:I introduce a novel, hierarchical model of tail dependent asset returns which can be particularly useful for measuring portfolio credit risk within the structural framework. To allow for a stronger dependence within sub-portfolios than between them, I utilise the concept of nested Archimedean copulas, but modify the nesting procedure to ensure the compatibility of copula generators by construction. This makes sampling straightforward. Moreover, I provide details on a particular specification based on a gamma mixture of powers. This model allows for lower tail dependence, resulting in a more conservative credit risk assessment than a comparable Gaussian model. I illustrate the extent of model risk when calculating VaR or Expected Shortfall for a credit portfolio.
Subjects:portfolio credit risk
nested Archimedean copula
tail dependence
hierarchical dependence structure
JEL:C46
C63
G21
ISBN:978-3-86558-755-8
Document Type:Working Paper
Appears in Collections:Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank

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