Analytical Framework for Credit Portfolios

Details Analytical Framework for Credit Portfolios Analytical Framework for Credit Portfolios

2010-07-30

arxiv.org/abs/1007.5433v1

Economy

Quantitative Finance

Risk Management

16 pages, 2 figures

Scientific paper

Analytical, free of time consuming Monte Carlo simulations, framework for credit portfolio systematic risk metrics calculations is presented. Techniques are described that allow calculation of portfolio-level systematic risk measures (standard deviation, VaR and Expected Shortfall) as well as allocation of risk down to individual transactions. The underlying model is the industry standard multi-factor Merton-type model with arbitrary valuation function at horizon (in contrast to the simplistic default-only case). High accuracy of the proposed analytical technique is demonstrated by benchmarking against Monte Carlo simulations.

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