Modeling Loss Risk in Loan Portfolios with Various Heterogeneity Factors

Maksim Osadchiy

MPRA Paper from University Library of Munich, Germany

Abstract: This paper extends the classical Vasicek credit risk model by introducing a comprehensive multi-factor framework that simultaneously incorporates key sources of portfolio heterogeneity – namely, variations in asset weights, recovery rates, default probabilities, and asset correlations. By modeling the complex interactions among these factors, our approach provides a more realistic and nuanced assessment of loss distributions and risk measures. Monte Carlo simulations demonstrate that the extended Vasicek-style model yields accurate approximations of portfolio Value at Risk (VaR) across portfolios with diverse recovery profiles and moderate concentration levels. This advancement improves the precision of credit risk measurement, addresses current regulatory gaps, and offers a solid foundation for more sophisticated risk management of heterogeneous credit portfolios.

Keywords: Heterogeneous Credit Portfolios; Granularity Adjustment; Vasicek Model; Value at Risk; Monte Carlo Simulation (search for similar items in EconPapers)
JEL-codes: C63 G17 G21 G28 G32 G33 (search for similar items in EconPapers)
Date: 2025-11-27
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:127032

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