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A Loan Portfolio Model Subject to Random Liabilities and Systemic Jump Risk

Luis H. R. Alvarez and Jani T. Sainioy
Turku School of Economics, Department of Accounting and Finance

We extend the Vasicek loan portfolio model to a setting where liabilities fluctuate randomly and asset values may be subject to systemic jump risk. We derive the probability distribution of the percentage loss of a uniform portfolio and analyze its properties. We find that the impact of liability risk is ambiguous and depends on the correlation between the continuous aggregate factor and the asset-liability ratio as well as on the default intensity. We also find that systemic jump risk has a signicant impact on the upper percentiles of the loss distribution and, therefore, on both the VaR-measure as well as on the expected shortfall.


This is a CRUCIAL methodological paper its application is in the pricing of Structured Products.

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Tags: asymptotix


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