Deriving Credit Portfolio Diversification Properties From Large Asset-Backed Security Pools

Topics:
Commercial Banking,
Commercial Lending,
Credit Risk Management
Tags:
Asset,
Asset Management,
Business Operations,
Correlation,
Operational Planning
Source:
Kansas State University

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Overview: The present analysis estimates Markowitz portfolio correlations for retail loan portfolios. The correlations are derived from almost $1 trillion of asset backed security pools originated by more than five hundred issuers between January and September. Such a broad sample, comprised of several hundred thousand pool-month observations, provides a unique opportunity to infer asset correlation structures of commercial bank assets. The analysis demonstrates that the performance of many different loan credit types is weakly correlated, and is sometimes even negatively correlated. Hence, there is the potential to eliminate a significant amount of risk in diversified credit portfolios.

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Format: PDF | Size: 464KB | Date: Dec 2005 | Pages: 84

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