Abstract
This paper has considered portfolio credit risk with a focus on two approaches, the factor model, and copula model. We have reviewed two models with emphasis on the joint default probably. The copula function describes the dependence structure of a multivariate random variable, in this paper, it used as a practical to simulation of generate portfolio with different copula, and we only used Gaussian and t–copula case. We generated portfolio default distributions and studied the sensitivity of commonly used risk measures with respect to the approach in modeling the dependence structure of the portfolio.
Highlights
We need to know components of portfolio risk and their interaction
The Basel Committee for Banking Supervision in its Basel II proposals to develop an appropriate framework for a global financial regulation system; seeBIS (2001)
Several portfolio credit risk models developed in the industry have been made public; e.g., CreditMetrics (Gupton et al 1997), CreditRisk+ (Credit Suisse Financial Products 1997) and Credit Portfolio View (Wilson 1997a and 1997b)
Summary
We need to know components of portfolio risk and their interaction. The Basel Committee for Banking Supervision in its Basel II proposals to develop an appropriate framework for a global financial regulation system; seeBIS (2001). Several portfolio credit risk models developed in the industry have been made public; e.g., CreditMetrics (Gupton et al 1997), CreditRisk+ (Credit Suisse Financial Products 1997) and Credit Portfolio View (Wilson 1997a and 1997b). Others remain proprietary, such as KMV’s Portfolio Manager (Kealhofer 1996). Crouhy et al (2000) compared and reviewed models on the benchmark portfolio like; the credit migration approach, the structural approach, the actuarial approach, and McKinsey approach.few studies have attempted to investigate aspects of portfolio risk based on rating-based credit risk models thoroughly. We applied a default-mode model to assess the impact of changing dependence structure within the portfolio. We mentioned about a factor model and focus on the effects of default dependence model on within the portfolio.Eventually, we simulated types of copula model with different degree of freedom within the portfolio
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