CreditRisk Model with Dependent Risk Factors

Ruodu Wang, Liang Peng and Jingping Yang

North American Actuarial Journal, 2015, vol. 19, issue 1, 24-40

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.

Date: 2015
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DOI: 10.1080/10920277.2014.976311

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