An Extended CreditRisk+ Framework for Portfolio Credit Risk Management
26 Pages Posted: 23 Apr 2014
Date Written: April 21, 2014
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.
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