Dresden 2009 – scientific programme
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AGSOE: Arbeitsgruppe Physik sozio-ökonomischer Systeme
AGSOE 4: Financial Markets and Risk Management III
AGSOE 4.3: Talk
Monday, March 23, 2009, 15:00–15:30, BAR 205
Credit Risk and the limits of diversification — •Rudi Schäfer1, Alexander Koivusalo2, and Thomas Guhr1 — 1Fachbereich Physik, Universität Duisburg-Essen, Germany — 2Mathematical Physics, LTH, Lund University, Sweden
In view of the current financial crises the modeling of credit risk is of great importance. We study a structural model which is based on a jump-diffusion process for the risk factors. In a portfolio of credit contracts, the correlations between the individual risk factors have a pronounced effect on the distribution of the portfolio losses. Even weak correlations lead to a heavy-tailed loss distribution and severely limit the benefits of diversification. We compare these findings to the predictions of reduced form models and discuss difficulties in measuring the correlations of defaults and recovery rates.