12 Pages Posted: 11 Nov 2007
Date Written: October 1998
In order to take advantage of credit portfolio management opportunities, management must first answer several technical questions: What is the risk of a given portfolio? How do different macroeconomic scenarios, at both the regional and the industry sector level, affect the portfolio's risk profile? What is the effect of changing the portfolio mix? How might risk-based pricing at the individual contract and the portfolio level be influenced by the level of expected losses and credit risk capital? This paper describes a new and intuitive method for answering these technical questions by tabulating the exact loss distribution arising from correlated credit events for any arbitrary portfolio of counterparty exposures, down to the individual contract level, with the losses measured on a marked-to-market basis that explicitly recognizes the potential impact of defaults and credit migrations.
Keywords: capital regulation
JEL Classification: G2, G3
Suggested Citation: Suggested Citation
Wilson, Thomas C., Portfolio Credit Risk (October 1998). Economic Policy Review, Vol. 4, No. 3, October 1998. Available at SSRN: https://ssrn.com/abstract=1028756 or http://dx.doi.org/10.2139/ssrn.1028756
By Kay Giesecke