Credit Portfolios: What Defines Risk Horizons and Risk Measurement?*

Abstract

The strong autocorrelation between economic cycles demands that we analyze credit portfolio risk in a multiperiod setup. We embed a standard one-factor model in such a setup. We discuss the calibration of the model to Standard & Poor's ratings data in detail. But because single-period risk measures cannot capture the cumulative effects of systematic shocks over several periods, we define an alternative risk measure, which we call the time-conditional expected shortfall(TES), to quantify credit portfolio risk over a multiperiod horizon.

Keywords: Credit risk management, portfolio management, risk measurement, coherence, VaR, expected shortfall, factor model

JEL Classification: C22, C51, E22, G18, G21, G33