an:07059806
Zbl 1414.91402
Wang, Ruodu; Peng, Liang; Yang, Jingping
CreditRisk\(^+\) model with dependent risk factors
EN
N. Am. Actuar. J. 19, No. 1, 24-40 (2015).
00433214
2015
j
91G40 62P05 62H05
credit risk model; conditional independence; dependent risk factors; Panjer's recursion; multivariate copulas
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 Fr??chet 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.