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A Comparative Anatomy of Credit Risk Models

29 Pages Posted: 3 Mar 1999 Last revised: 30 Jan 2011

Michael B. Gordy

Board of Governors of the Federal Reserve

Date Written: December 8, 1998

Abstract

Within the past two years, important advances have been made in modeling credit risk at the portfolio level. Practitioners and policy makers have invested in implementing and exploring a variety of new models individually. Less progress has been made, however, with comparative analyses. Direct comparison often is not straightforward, because the different models may be presented within rather different mathematical frameworks. This paper offers a comparative anatomy of two especially influential benchmarks for credit risk models, the RiskMetrics Group's CreditMetrics and Credit Suisse Financial Product's CreditRisk. We show that, despite differences on the surface, the underlying mathematical structures are similar. The structural parallels provide intuition for the relationship between the two models and allow us to describe quite precisely where the models differ in functional form, distributional assumptions, and reliance on approximation formulae. We then design simulation exercises which evaluate the effect of each of these differences individually.

JEL Classification: G31, C15, G11

Suggested Citation

Gordy, Michael B., A Comparative Anatomy of Credit Risk Models (December 8, 1998). Journal of Banking and Finance, Vol. 24, No. 1/2, 2000; Board of Governors of the Federal Reserve System FEDS Paper No. 98-47. Available at SSRN: https://ssrn.com/abstract=148750 or http://dx.doi.org/10.2139/ssrn.148750

Michael B. Gordy (Contact Author)

Board of Governors of the Federal Reserve ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3705 (Phone)

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