Evaluating the Default Risk of Bond Portfolios with Extreme Value Theory

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• 作者：Yong Ma (1)
  Zhengjun Zhang (2)
  Weiguo Zhang (3)
  Weidong Xu (4)
  
  1. College of Finance and Statistics ; Hunan University ; Changsha ; 聽410079 ; People鈥檚 Republic of China
  2. Department of Statistics ; University of Wisconsin-Madison ; Madison ; WI ; 53706 ; USA
  3. School of Business Administration ; South China University of Technology ; Guangzhou ; 聽510641 ; People鈥檚 Republic of China
  4. School of Management ; Zhejiang University ; Hangzhou ; 310085 ; People鈥檚 Republic of China
  
• 关键词：Credit risk ; Bond portfolio ; Extreme value theory ; Hierarchical Gumbel copula
• 刊名：Computational Economics
• 出版年：2015
• 出版时间：April 2015
• 年：2015
• 卷：45
• 期：4
• 页码：647-668
• 全文大小：454 KB
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• 刊物类别：Business and Economics
• 刊物主题：Economics
  Economic Theory
  
• 出版者：Springer Netherlands
• ISSN：1572-9974

文摘

Credit risk management is important for the investors in practical risk management. This paper aims to discuss how to evaluate the default risk of bond portfolios by applying extreme value theory. Based on Black and Cox default approach, we propose a novel threshold default model and use extreme value theory to derive the distribution functions of the state variables. To some extent, our model can be regarded as the counterpart of CreditMetrics, which is based on Merton approach. According to multivariate extreme value theory, extreme value copula is applicable to build the dependence between the state variables; on the other hand, it is more probable that default clustering occurs in the same region or sector in reality. Taking these into account, we adopt hierarchical Gumbel copulas, which are tail-dependent extreme value copulas and can group the bonds by regions or sectors, to link the state variables. An empirical bond portfolio is used to illustrate the model. The results show that, compared with CreditMetrics and the simple Gumbel copula model, the extremal tail of the distribution of loss from default in the proposed model is heavier. Consequently, the proposed model seems relatively conservative in terms of stress testing.