Title: Measuring the diversification of a loan portfolio

Authors: Agnès Tourin

Addresses: Department of Finance and Risk Engineering, New York University Tandon School of Engineering, 6 Metrotech Center, Brooklyn, New York 11201, USA

Abstract: We analyse the effect of correlations on a portfolio of loans. Building on an earlier idea developed at Moody's (Witt, 2004), we define the diversification score as the number of independent loans in an equivalent credit portfolio with the same expected loss and risk level. We perform Monte Carlo simulations to analyse the applicability of this method for two risk measures, namely value at risk and the expected shortfall.

Keywords: loan portfolio; default correlations; risk measure; value at risk; expected shortfall; diversification; Monte Carlo sampling.

DOI: 10.1504/IJBD.2020.109320

International Journal of Bonds and Derivatives, 2020 Vol.4 No.2, pp.104 - 113

Received: 24 Jun 2019
Accepted: 14 Jul 2019
Published online: 03 Sep 2020 *

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