Abstract
Experiences manifest the importance of comovement and communicable characters among the risks of financial assets. Therefore, the portfolio view considering dependence relationship among credit entities is at the heart of risk measurement. This paper introduces a mixed Poisson model assuming default probabilities of obligors depending on a set of common economic factors to construct the dependence structure of obligors. Further, we apply mixed Poisson model into an empirical study with data of four industry portfolios in the financial market of China. In the process of model construction, the classical structural approach and option pricing formula contribute to estimate dynamic default probabilities of single obligor, which helps to obtain the dynamic Poisson intensities under the model assumption. Finally, given the values of coefficients in this model calculated by a nonlinear estimation, Monte Carlo technique simulates the progress of loss occurrence. Relationship between default probability and loss level reflected through the MC simulation has practical features. This study illustrates the practical value and effectiveness of mixed Poisson model in risk measurement for credit portfolio.
Highlights
Financial system is the core of modern economy and the risk in it has a huge impact on economic development
Glasserman and Li [16] propose another top-down model, a mixed Poisson mechanism, originally associated with CreditRisk+ [17], to capture the dependence between risk factors. This paper introduces this model and applies it into empirical study with data in financial market of China for the reason that the mixed Poisson model has less model risk, because the loss distribution in mixed Poisson is the aggregate of all units whose model risk can be offset by each other
Mixed Poisson model is introduced in this paper to replace the widely used copula model
Summary
Financial system is the core of modern economy and the risk in it has a huge impact on economic development. This paper applies the structural approach to measure default risk of a single firm. Glasserman and Li [16] propose another top-down model, a mixed Poisson mechanism, originally associated with CreditRisk+ [17], to capture the dependence between risk factors. This paper introduces this model and applies it into empirical study with data in financial market of China for the reason that the mixed Poisson model has less model risk, because the loss distribution in mixed Poisson is the aggregate of all units whose model risk can be offset by each other.
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