Take Action

Home | Faculty & Research Overview | Research

Research Details

Portfolio Credit Risk with Extremal Dependence, Operations Research


We consider the risk of a portfolio comprised of loans, bonds, and financial instruments that are subject to possible default. In particular, we are interested in the probability that the portfolio will incur large losses over a fixed time horizon. Contrary to the normal copula that is commonly used in practice (e.g., in the CreditMetrics system), we assume a portfolio dependence structure that supports {\it extremal dependence} among obligors and does not hinge solely on correlation. A particular instance within this model class is the so-called $t$-copula model that is derived from the multivariate Student $t$ distribution and hence generalizes the normal copula model. The size of the portfolio, the heterogenous mix of obligors, and the fact that default events are rare and mutually dependent makes it quite complicated to calculate portfolio credit risk either by means of exact analysis or naive Monte Carlo simulation. The main contributions of this paper are twofold. We first derive sharp asymptotics for portfolio credit risk that illustrate the implications of extremal dependence among obligors. Using this as a stepping stone, we develop multi-stage importance sampling algorithms that are shown to be asymptotically optimal and can be used to efficiently compute portfolio credit risk via Monte Carlo simulation.




Achal Bassamboo, Sandeep Juneja, Assaf Zeevi

Date Published



Bassamboo, Achal, Sandeep Juneja, and Assaf Zeevi. 2008. Portfolio Credit Risk with Extremal Dependence. Operations Research.(3): 593-606.


Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more


Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.


Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more