Dynamic Multi-Factor Credit Risk Model with Fat-Tailed Factors

Petr Gapko () and Martin Smid ()
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Martin Smid: Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, http://www.utia.cas.cz/

Czech Journal of Economics and Finance (Finance a uver), 2012, vol. 62, issue 2, 125-140

Abstract: The authors introduce an improved multi-factor credit risk model describing simultaneously the default rate and the loss given default. Their methodology is based on the KMV model, which they generalize in three ways. First, they add a model for loss given default (LGD), second, they bring dynamics to the model, and third, they allow non-normal distributions of risk factors. Both the defaults and the LGD are driven by a common factor and an individual factor; the individual factors are mutually independent, but the authors allow any form of dependence of the common factors. They test their model on a nationwide portfolio of US mortgage delinquencies, modeling the dependence of the common factor by a VECM model, and compare their results with the current regulatory framework, which is described in the Basel II Accord.

Keywords: credit risk; probability of default; loss given default; credit loss; credit loss distribution; Basel II (search for similar items in EconPapers)
JEL-codes: C58 G21 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:62:y:2012:i:2:p:125-140

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