CreditRisk+ Model with Dependent Risk Factors |
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Authors: | Ruodu Wang Liang Peng |
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Institution: | 1. Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario, Canada;2. Department of Risk Management and Insurance, Georgia State University, Atlanta, Georgia |
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Abstract: | The CreditRisk+ model is widely used in industry for computing the loss of a credit portfolio. The standard CreditRisk+ model assumes independence among a set of common risk factors, a simplified assumption that leads to computational ease. In this article, we propose to model the common risk factors by a class of multivariate extreme copulas as a generalization of bivariate Fréchet copulas. Further we present a conditional compound Poisson model to approximate the credit portfolio and provide a cost-efficient recursive algorithm to calculate the loss distribution. The new model is more flexible than the standard model, with computational advantages compared to other dependence models of risk factors. |
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Keywords: | + model" target="_blank">CreditRisk+ model conditional independence dependent risk factors Panjer’s recursion multivariate copulas |
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