24 Pages Posted: 16 Mar 2009
Date Written: 2008
The Credit Risk model is one of the industry standards for estimating the credit default risk for a portfolio of credit loans.
The natural parameterization of this model requires the default probability to be apportioned using a number of (non-negative) factor loadings. However, in practice only default correlations are often available but not the factor loadings. In this paper we investigate how to deduce the factor loadings from a given set of default correlations.
This is a novel approach and it requires the non-negative factorization of a positive semi-definite matrix which is by no means trivial. We also present a numerical optimization algorithm to achieve this.
Keywords: Basel II, KMV, Asset Correlations, Default Correlations
Suggested Citation: Suggested Citation
Vandendorpe, Antoine and Ho, Hien Ngoc and Vanduffel, Steven and Van Dooren, Paul, On the Parameterization of the Creditrisk-Plus Model for Estimating Credit Portfolio Risk (2008). Insurance: Mathematics and Economics, Vol. 42, No. 2, 2008. Available at SSRN: https://ssrn.com/abstract=1359580