Within the framework of the Merton model, we consider the problem of concurrent portfolio losses in two non-overlapping credit portfolios. In order to explore the full statistical dependence structure  , we estimate the pairwise copulasof such portfolio losses . Instead of a Gaussian dependence, we typically find a strong asymmetry in the copulas. Concurrent large portfolio losses are much more likely than small ones. Studying the dependences of these losses as a function of portfolio size, we moreover reveal that not only large portfolios of thousands of contracts, but also medium-sized and small ones with only a few dozens of contracts exhibit notable  loss correlations. Anticipated idiosyncratic effects turn out to be negligible in almost every realistic setting . These are troublesome insights not only for investors in structured fixed-income products, but particularly for the stability of the financial sector.
We consider the problem of concurrent portfolio losses in two non-overlapping credit portfolios. In order to explore the full statistical dependence structure of such portfolio losses , we estimate their empirical pairwise copulas . Instead of a Gaussian dependence, we typically find a strong asymmetry in the copulas. Concurrent large portfolio losses are much more likely than small ones. Studying the dependences of these losses as a function of portfolio size, we moreover reveal that not only large portfolios of thousands of contracts, but also medium-sized and small ones with only a few dozens of contracts exhibit notable portfolio loss correlations. Anticipated idiosyncratic effects turn out to be negligible . These are troublesome insights not only for investors in structured fixed-income products, but particularly for the stability of the financial sector.
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Within the framework of the Merton model, we
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of such portfolio losses
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the pairwise copulasof such portfolio losses
their empirical pairwise copulas
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portfolio
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in almost every realistic setting