Relationships between default probability and VaR (Malz,Chapter 9)

[Unusualskill]

Hi @David Harper CFA FRM ,

While holding correlation constant, may I ask why increasing default probability will decrease VaR for the junior tranches and increases VaR for the senior tranches?

Thank you!

 

[Nicole Seaman]

Hi @David Harper CFA FRM ,

While holding correlation constant, may I ask why increasing default probability will decrease VaR for the junior tranches and increases VaR for the senior tranches?

Thank you!

Hello @Unusualskill

I'm not sure if this will answer your question, as I'm not 100% sure if this is exactly the same concept, but I did find a thread in the forum, where someone else asked this question. There is a good deal of discussion in this thread, including a helpful YouTube video. Again, not sure if this will answer your question, but hopefully it can help a little bit. https://forum.bionicturtle.com/thre...lity-on-equity-and-mezzanine.8144/#post-32295

Nicole

 

[Unusualskill]

Hi @Nicole Seaman , @David Harper CFA FRM ,

yeah, appreciate the post above, I read that before. However, my question is with regards to VaR instead. Any intuitive way to explain? Thank you!

 

[Unusualskill]

@David Harper CFA FRM

Can help with this question? thx!