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CreditRisk Model with Dependent Risk Factors

Author

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  • Ruodu Wang
  • Liang Peng
  • Jingping Yang

Abstract

The CreditRisk+ model is widely used in industry for computing the loss of a credit portfolio. The standard CreditRisk+ model assumes independence among a set of common risk factors, a simplified assumption that leads to computational ease. In this article, we propose to model the common risk factors by a class of multivariate extreme copulas as a generalization of bivariate Fréchet copulas. Further we present a conditional compound Poisson model to approximate the credit portfolio and provide a cost-efficient recursive algorithm to calculate the loss distribution. The new model is more flexible than the standard model, with computational advantages compared to other dependence models of risk factors.

Suggested Citation

  • Ruodu Wang & Liang Peng & Jingping Yang, 2015. "CreditRisk Model with Dependent Risk Factors," North American Actuarial Journal, Taylor & Francis Journals, vol. 19(1), pages 24-40, January.
    • Handle: RePEc:taf:uaajxx:v:19:y:2015:i:1:p:24-40
    DOI: 10.1080/10920277.2014.976311
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    Cited by:

    1. Papalamprou, Konstantinos & Antoniou, Paschalis, 2019. "Estimation of capital requirements in downturn conditions via the CBV model: Evidence from the Greek banking sector," Operations Research Perspectives, Elsevier, vol. 6(C).
    2. Huang, Zhenzhen & Kwok, Yue Kuen & Xu, Ziqing, 2024. "Efficient algorithms for calculating risk measures and risk contributions in copula credit risk models," Insurance: Mathematics and Economics, Elsevier, vol. 115(C), pages 132-150.
    3. Dirk Tasche, 2015. "The Two Defaults Scenario for Stressing Credit Portfolio Loss Distributions," JRFM, MDPI, vol. 9(1), pages 1-18, December.
    4. Wei, Li & Yuan, Zhongyi, 2016. "The loss given default of a low-default portfolio with weak contagion," Insurance: Mathematics and Economics, Elsevier, vol. 66(C), pages 113-123.

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