CreditRisk\(^+\) model with dependent risk factors. (English) Zbl 1414.91402

Summary: 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.


91G40 Credit risk
62P05 Applications of statistics to actuarial sciences and financial mathematics
62H05 Characterization and structure theory for multivariate probability distributions; copulas


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