Portfolio Homogeneity

From Open Risk Manual

Definition

Portfolio Homogeneity in the context of Portfolio Management denotes the degree to which a given collection of financial assets or liabilities exhibits common characteristics.

Portfolio Homogeneity is a broader and less stringent attribute than Statistical Homogeneity. The later must be defined in concrete statistical metrics.

Benefits

From the investor’s perspective

  • A portfolio with homogeneous underlying exposures that exhibit similar risk profiles and cash flow characteristics should allow investors to assess the underlying

risks (in particular credit risks) on the basis of common methodologies and parameters.

  • The investor does not need to analyse and assess materially different risk profiles and cash flow characteristics when carrying out the risk analysis and due diligence.

Implications

A homogeneous portfolio is by construction less diversified than a portfolio that does not satisfy any homogeneity constraints. Diversification, as an instrument for preventing Concentration Risk is balanced against the need for a sufficient degree of homogeneity

Usage

Portfolio homogeneity has become a major criterion for establishing high quality securitisation standards[1]

Homogeneity Conditions

The EBA proposed conditions for underlying exposures in a given portfolio to be considered homogeneous:

  • they have been underwritten according to similar underwriting standards
  • they are serviced according to similar servicing procedures
  • they fall within the same asset category
  • for a majority of asset categories, they need to be homogeneous with reference to at least one homogeneity factor

Homogeneity Factors

  • type of obligor
  • the ranking of security rights on a property
  • the type of immovable property
  • and jurisdiction of the property/obligor

References

  1. "On the homogeneity of the underlying exposures in securitisation", EBA Final Draft Regulatory Technical Standards, Jul 2018

Contributors to this article

» Wiki admin