Credit Risk Term-Structures for Lifetime Impairment Forecasting: A Practical Guide

26 Pages Posted: 15 Jul 2016 Last revised: 13 Oct 2016

Date Written: October 7, 2016

Abstract

In this paper we provide an overview of the credit model approaches for lifetime impairment models. The main focus is on the models for credit risk term-structures which are a particularly important component that banks are currently struggling with. However, we also discuss briefly the different model approaches for loss given default and exposure. The aim with this paper is to provide a (relatively) non-technical overview of modeling approaches to aid in understanding different models properties and consequently in model selection. For those that require more details for actual model implementation we provide references to the literature. We also discuss how to decompose the period to period impairment change into its components for change explanation. Such decomposition can be done using incremental change of the components, or, a log-linearization. The benefiit of the log-linearization is its order independence.

Suggested Citation

Skoglund, Jimmy, Credit Risk Term-Structures for Lifetime Impairment Forecasting: A Practical Guide (October 7, 2016). Available at SSRN: https://ssrn.com/abstract=2808397 or http://dx.doi.org/10.2139/ssrn.2808397

Jimmy Skoglund (Contact Author)

SAS Institute Inc. ( email )

100 SAS Campus Drive
Cary, NC 27513-2414
United States

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