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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.

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