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Luis H. R. Alvarez and Jani T. Sainioy

Turku School of Economics, Department of Accounting and Finance

Abstract

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.

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

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