Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/52132
Authors: 
Puzanova, Natalia
Year of Publication: 
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

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