Journal of Risk Model Validation
ISSN:
1753-9579 (print)
1753-9587 (online)
Editor-in-chief: Steve Satchell
![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Sensitivities and worst-case correlations for hitting probabilities of portfolio tranches
Stefan Huschens, Christoph Lehmann and Daniel Tillich
Abstract
ABSTRACT
We analyze the hitting probability of a portfolio tranche under the assumption of a Vasicek-distributed portfolio loss. The sensitivities of the hitting probability with respect to the default probability and the asset correlation of the portfolio are derived. We show that the hitting probability as a function of the correlation is non-monotonic for certain parameter constellations; this leads to worst-case hitting probabilities and worstcase correlations for each tranche. Thus, stress-testing procedures require different worst-case scenarios for different tranches depending on the parameters. All the findings on hitting probabilities carry over to wipe-out probabilities.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net