Duffie 2009 Frailty Correlated Default.pdf

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1、THEJOURNALOFFINANCE•VOL.LXIV,NO.5•OCTOBER2009FrailtyCorrelatedDefaultDARRELLDUFFIE,ANDREASECKNER,GUILLAUMEHOREL,andLEANDROSAITA∗ABSTRACTTheprobabilityofextremedefaultlossesonportfoliosofU.S.corporatedebtismuchgreaterthanwouldbeestimatedunderthestandardassumptionthatdefaultcorrela-tionarisesonly

2、fromexposuretoobservableriskfactors.Atthehighconfidencelevelsatwhichbankloanportfolioandcollateralizeddebtobligation(CDO)defaultlossesaretypicallymeasuredforeconomiccapitalandratingpurposes,conventionallybasedlossestimatesaredownwardbiasedbyafullorderofmagnitudeontestportfolios.Ourestimatesareb

3、asedonU.S.publicnonfinancialfirmsbetween1979and2004.Wefindstrongevidenceforthepresenceofcommonlatentfactors,evenwhencontrollingforobservablefactorsthatprovidethemostaccurateavailablemodeloffirm-by-firmdefaultprobabilities.THISPAPERPROVIDESamorerealisticassessmentoftheriskoflargedefaultlossesonp

4、ortfoliosofU.S.corporatedebtthanhadbeenavailablewithpriormethodologies.Atthehighconfidencelevelsatwhichportfoliodefaultlossesaretypicallyestimatedformeetingbankcapitalrequirementsandratingcol-lateralizeddebtobligations(CDOs),ourempiricalresultsindicatethatconven-tionalestimatorsaredownwardbiase

5、dbyafullorderofmagnitudeontypicaltestportfolios.OurestimatesarebasedonportfoliosofU.S.corporatedebtex-istingbetween1979and2004.Forestimatinghigh-quantileportfoliolosses,conventionalmethodologiessufferfromtheirfailuretocorrectforasignificantdownwardomittedvariablebias.Wefindstrongevidencethatfir

6、msareex-posedtoacommondynamiclatentfactordrivingdefault,evenaftercontrollingforobservablefactorsthatontheirownprovidethemostaccurateavailablemodeloffirm-by-firmdefaultprobabilities.Bothuncertaintyaboutthecurrentlevelofthisvariable,aswellasjointexposuretofuturemovementsofthisvariable,causeasubst

7、antialincreaseintheconditionalprobabilityoflargeportfoliodefaultlosses.Aconventionalportfoliolossriskmodelassumesthatborrower-levelcondi-tionaldefaultprobabilitiesdependonmeasuredfirm-specificormarketwidefactors.Portfoliolossdistr