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1420. LHP approximation for green-loan credit portfolios under skewed and heavy-tails returns

Invited abstract in session WB-63: Risk Management in Private and Public Finance, stream OR in Banking, Finance and Insurance: New Tools for Risk Management.

Wednesday, 10:30-12:00
Room: S14 (building: 101)

Authors (first author is the speaker)

1. Alessandro Ramponi
Economics and Finance, Università di Roma Tor Vergata

Abstract

In recent years, efforts to address climate change and promote the creation of an environmentally sustainable economy have intensified. This commitment has spurred the emergence of financial instruments designed to support activities commonly referred to as "green". Financial institutions, as well as non-financial corporations or local governments, engage in lending activities to fund challenging low-carbon transition objectives. This includes financing rooftop solar power, wind farms, environmentally friendly farming practices, water conservation, the leasing of hybrid and electric vehicles, and initiatives aimed at enhancing the energy efficiency of industrial, commercial and residential properties.
One prevalent approach to model portfolio credit risk involves employing the LHP (Large Homogeneous Portfolio) approximation within the one-factor Merton-type framework, commonly referred to as the ASRF (Asymptotic Single Risk Factor) model. In this work we consider the classical Vasicek Gaussian model under more general distributional assumptions for the systematic risk factors. We specifically examine how the quantiles of the loss portfolio are affected by mixing distributions characterized by skewed and heavy-tail properties. This analysis is conducted in the context of loans, some of which are designated as "green", indicating their allocation towards financing environmentally sustainable assets.

Keywords

Status: accepted

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