The potential for portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. Using a global vector autoregressive...

We develop a framework for modeling conditional loss distributions through the introduction of risk factor dynamics. Asset value changes of a credit portfolio are linked to a dynamic global macroeconometric model, allowing macro effects to be isolated from idiosyncratic shocks. Default...

In theory the potential for credit risk diversifcation for banks could be substantial. Portfolios are large enough that idiosyncratic risk is diversifed away leaving exposure to systematic risk. The potential for portfolio diversifcation is driven broadly by two characteristics: the degree to...