Ludger Overbeck

Systematic Risk in Homogeneous Credit Portfolios

In credit portfolios (see [5] for an introduction) there are typically two types of counterparties: Listed firms and non-listed borrowers. For the first type, a time series of the firm’s equity values can be used to derive an Ability-to-Pay Process (APP), showing for every point in time the firm’s ability to pay, see e.g. [6]. For the second type, equity processes are not available, but still every borrower somehow admits an APP, depending on the customer’s assets and liabilities, sometimes known by the lending institute, but in any case imposed as an unobservable latent variable. In general, we can expect that correlations between the obligor’s APPs strongly influence the portfolio’s credit risk.

Term Structure of Loss Cascades in Portfolio Securitisation

We report on the term structure of loss cascades generated through portfolio tranching. The results are based on the analytical form of the loss distribution for uniform loan portfolios and show that the expected loss of the first loss position increases roughly linear whereas the expected losses of the more senior tranches increase exponentially over time depending on the relation between mean default probability and tranching limits.