An Extended CreditRisk+ Framework for Portfolio Credit Risk Management

26 Pages Posted: 23 Apr 2014

See all articles by Chulwoo Han

Chulwoo Han

Sungkyunkwan University

Jangkoo Kang

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Date Written: April 21, 2014

Abstract

Independent sector assumption in the CreditRisk+ has been a major obstacle to implementing the model. Attempts to overcome this limitation have not gained much success. This paper proposes an extension of the original model which accommodates a wide range of sector covariance structures. Existing numerical algorithms designed for the original model can be reused with little modification. Case studies show that our model outperforms other CreditRisk+ variants which allow sector dependency.

A simulation version of our model is also introduced, which in turn used to find an optimal portfolio allocation based on the work of Andersson et al. (2001). Simulation error is very small compared to the analytic counterpart and the optimization significantly reduces portfolio credit risk.

Suggested Citation

Han, Chulwoo and Kang, Jangkoo, An Extended CreditRisk+ Framework for Portfolio Credit Risk Management (April 21, 2014). Available at SSRN: https://ssrn.com/abstract=2427489 or http://dx.doi.org/10.2139/ssrn.2427489

Chulwoo Han (Contact Author)

Sungkyunkwan University ( email )

25-2, Sungkyunkwan-ro
Jongno-gu
Seoul, 03063

Jangkoo Kang

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul 02455
Korea, Republic of (South Korea)
+82 2 958 3521 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
399
Abstract Views
1,573
Rank
135,524
PlumX Metrics