Within the framework of the Merton model, we consider the problem of concurrent portfolio losses in two non-overlapping credit portfolios. In order to explore the full statistical dependence structure, we estimate the pairwise copulas of such portfolio losses. Instead of a Gaussian dependence, we typically find a strong asymmetry in the copulas. Concurrent large portfolio losses are much more likely than small ones. Studying the dependences of these losses as a function of portfolio size, we moreover reveal that not only large portfolios of thousands of contracts, but also medium-sized and small ones with only a few dozens of contracts exhibit notable loss correlations. Anticipated idiosyncratic effects turn out to be negligible in almost every realistic setting. These are troublesome insights not only for investors in structured fixed-income products, but particularly for the stability of the financial sector.
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