hard · Frm Part 2 Market Risk
A portfolio of two corporate bonds has a 1-year default probability of PD_1 = PD_2 = 2%. The risk manager compares a Gaussian copula and a Student-t copula (with ν = 4 degrees of freedom), both calibrated to the same asset correlation of ρ = 0.25.
Which model will produce a higher joint default probability, and why?
- Both will produce identical joint default probabilities because the marginal PDs and correlation are matched.
- The Student-t copula, because it has fewer degrees of freedom than the Gaussian.
- The Gaussian copula, because the asset correlation is positive.
- The Student-t copula, because it exhibits tail dependence.
Sign up free to see the explanation and track your rank →
More Frm Part 2 Market Risk practice
- A leptokurtic distribution, often modeled by EVT, is characterized by which of the followi
- If a bank records 11 exceptions in a 250-day backtesting window for 99% VaR, what is the r
- In the GPD framework, if the threshold u is chosen too low, what is the most likely error
- In the Kupiec Likelihood Ratio test, what does the null hypothesis (H_0) state?
- The Hill estimator is primarily used to provide a direct estimate of which parameter?
- What happens to the mean of a GPD-distributed variable if the tail index ξ ≥ 1?
- What happens to the VaR estimate if we move from a thin-tailed (Gumbel, ξ = 0) model to a
- What is the base capital multiplier (m) applied to a bank's internal model market risk cap