We determine the magnitude and nature of systematic default risk using 1971{2009) default data from Moody's. We disentangle systematic risk factors due to business cycle effects, common default dynamics (frailty), and industry-specific dynamics (including contagion). To quantify the contribution...

The paper characterizes first and second order tail behavior ofconvolutions of i.i.d. heavy tailed random variables with supporton the real line. The result is applied to the problem of riskdiversification in portfolio analysis and to the estimation of theparameter in a MA(1) model.

We characterize the investor’s optimal portfolio allocation subject to a budget constraint and a probabilistic VaR constraint in complete markets environments with a finite number of states. The set of feasible portfolios might no longer be connected or convex, while the number of local optima...