Credit models
From FinMath
We discuss latent variable, dynamic single portfolio (top down), dynamic multi-portfolio, Copula models, and more. We could use a whole section on recovery models in isolation. See also the notes on recent talks at conferences.
Contents |
[edit] Single Name Credit Models
Single name credit models describe the likelihood of default events and the prices of related financial securities pertaining to a particular company, sovereign or agency. Debt may be treated in isolation or related to the remainder of the capital structure as in debt equity models (also called structural models).
[edit] Portfolio Credit Models
Portfolio credit models describe the frequency of default and/or the time evolution of real or risk neutral default probabilities for a plurality of reference entities. Of interest in the modeling of first-to-default instruments are models incorporating as few as five names. More commonly, portfolio credit models anticipate hundreds if not thousands of assets whose joint default distribution, default intensity evolution, recoveries given default and default swap spread dynamics for various maturities are in play.
Portfolio credit models may be classified as static portfolio credit models or dynamic portfolio credit models depending on the scope of inquiry. The former class is typified by the use of Copula functions describing the joint distribution of credit events assuming marginal survival probabilities for assets. The Normal Copula model remains the most commonly used example, despite known problems. Static portfolio credit models are so named because no attempt is made to describe the joint distribution of credit events after "time zero".
The latter class is characterized by explicit or readily inferred dynamic evolution of default intensities (or strongly related traded quantities). Dynamic portfolio credit models ostensibly describe the joint distribution of credit event probabilities at a plurality of time steps. This taxonomy is somewhat unsatisfying because dynamic quantities for most static models can in principle be computed - with or without further observed processes. For this reason we include a further classification: Latent variable portfolio credit models.
Naturally, portfolio credit models may incorporate dynamics for equity, interest rate, foreign exchange, commodity and other markets.
[edit] See also
[edit] External Links
- DefaultRisk.Com. A definitive up to date collection of credit modeling papers.
- Moodys KMV new research papers
