Copula Methods and the Analysis of Credit Risk

31 Pages Posted: 17 Sep 2007

See all articles by David T. Hamilton

David T. Hamilton

Moody's Analytics

Jessica James

Risk Advisory Group

Nick Webber

University of Warwick - Warwick Business School

Date Written: January 2001

Abstract

Banks' internal credit risk assessment may take into account not only publicly available ratings but also internal measures of credit risk. We present a credit rating model of credit risk that permits banks to employ their own risk assessment in addition to public rating information. Banks need to evaluate the credit risk of portfolios of risky assets. Ordinary correlation techniques fail to capture dependency relationships between marginal distribution functions. The copula can describe these relationships exactly. To model the credit risk of baskets of securities we examine dependency using copula methods paired with EVT techniques. We empirically estimate the dependency between different credit classes, and discuss the application of the empirical copula to valuation problems.

Keywords: credit risk management, default correlation, copula

JEL Classification: C10, G12, G21

Suggested Citation

Hamilton, David T. and James, Jessica and Webber, Nick, Copula Methods and the Analysis of Credit Risk (January 2001). Available at SSRN: https://ssrn.com/abstract=1014407 or http://dx.doi.org/10.2139/ssrn.1014407

David T. Hamilton (Contact Author)

Moody's Analytics ( email )

7 World Trade Center
250 Greenwich Street
New York, NY 10007
United States
(212) 553-1695 (Phone)

HOME PAGE: http://web.mac.com/dthamilton

Jessica James

Risk Advisory Group ( email )

399 Park Avenue
New York, NY 10043
United States

Nick Webber

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom
+(44) 24 7652 4664 (Phone)

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