Computational aspects of integrated market and credit portfolio models

Abstract

In this paper, it is analyzed whether a Fourier-based approach can be an efficient tool for calculating risk measures in the context of a credit portfolio model with integrated market risk factors. For this purpose, this technique is applied to a version of the well-known credit portfolio model CreditMetrics, extended by correlated interest rate and credit spread risk. While Fourier-based methods are reported to be superior to full Monte Carlo simulations for default mode models, this result cannot be confirmed for the integrated market and credit portfolio model used here. The application of standard importance sampling techniques for improving the performance of the Fourier-based approach is problematic, too. However, combining the full Monte Carlo simulation with an importance sampling technique indeed yields superior results, even for the integrated market and credit portfolio model.