We show that including distribution costs into a general equilibrium model of international portfolio choice contributes to explaining the “home bias” in international equity investment. Our model is able to replicate observed investment positions for a wide range of parameter values, even...

Most credit portfolio models calculate the loss distribution of a portfolio consisting solely of performing counterparts. We develop two models that account for defaulted counterparts in the calculation of the economic capital. First, we model the portfolio of non-performing counterparts...

"Arbitrage CDOs" have recorded an explosive growth during the years before the outbreak of the financial crisis. In the present paper we discuss potential sources of such arbitrage opportunities, in particular arbitrage gains due to mispricing. For this purpose we examine the risk profiles of...

The credit value-at-risk model underpinning the Basel II Internal Ratings-Based approach assumes that idiosyncratic risk has been diversified away fully in the portfolio, so that economic capital depends only on systematic risk contributions. We develop a simple methodology for approximating the...

The risk of a credit portfolio depends crucially on correlations between latent covariates, for instance the probability of default (PD) in different economic sectors. Often, correlations have to be estimated from relatively short time series, and the resulting estimation error hinders the...

This paper introduces a test for zero correlation in situations where the correlation matrix is large compared to the sample size. The test statistic is the sum of the squared correlation coefficients in the sample. We derive its limiting null distribution as the number of variables as well as...

The situation of a limited availability of historical data is frequently encountered in portfolio risk estimation, especially in credit risk estimation. This makes it, for example, difficult to find temporal structures with statistical significance in the data on the single asset level. By...

Lending specialization on certain industry sectors can have opposing effects on monitoring (including screening) abilities and on the sectoral concentration risk of a credit portfolio. In this paper, we examine in the first part if monitoring abilities of German cooperative banks and savings...

Instruments for credit risk transfer arise endogenously from and interact with optimizing behavior of their users. This is particularly true with credit derivatives which are usually OTC contracts between banks as buyers and sellers of credit risk. Recent literature, however, does not account...

The purpose of this paper is to measure the potential impact of business-sector concentration on economic capital for loan portfolios and to explore a tractable model for its measurement. The empirical part evaluates the increase in economic capital in a multi-factor asset value model for...