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date: 01 October 2020

Abstract and Keywords

This article, which provides the first complete exposition of the saddlepoint method to the calculation and management of portfolio losses, in an environment that is quite general and therefore applicable to many asset classes and many models, is divided into two parts. First, it discusses the construction of the distribution of losses, which is an essential ingredient of valuing collateralised debt obligation tranches and calculating risk measures at different levels of confidence. Second, the article examines where the risk is coming from, which more formally means the sensitivity of risk to asset allocation – an idea that is fundamental to portfolio theory and risk management, and which is at the heart of the Capital Asset Pricing Model.

Keywords: portfolio loss management, collateralised debt obligation, risk management, credit risk, asset allocation, Capital Asset Pricing

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