Bee, Marco (2007) The asymptotic loss distribution in a fat-tailed factor model of portfolio credit risk. UNSPECIFIED.

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Abstract

This paper extends the standard asymptotic results concerning the percentage loss distribution in the Vasicek uniform model to a setup where the systematic risk factor is non-normally distributed. We show that the asymptotic density in this new setup can still be obtained in closed form; in particular, we derive the return distributions, the densities and the quantile functions when the common factor follows two types of normal mixture distributions (a two-population scale mixture and a jump mixture) and the Student’s t distribution. Finally, we present a real-data application of the technique to data of the Intesa - San Paolo credit portfolio. The numerical experiments show that the asymptotic loss density is highly flexible and provides the analyst with a VaR which takes into account the event risk incorporated in the fat-tailed distribution of the common factor.

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