Credit risk - A structural model with jumps and correlations

Details Credit risk - A structural model with jumps and correlations Credit risk - A structural model with jumps and correlations

2007-07-24

arxiv.org/abs/0707.3478v2

Physica A 383, 533 (2007)

Economy

Quantitative Finance

Risk Management

24 pages

Scientific paper

10.1016/j.physa.2007.04.053

We set up a structural model to study credit risk for a portfolio containing several or many credit contracts. The model is based on a jump--diffusion process for the risk factors, i.e. for the company assets. We also include correlations between the companies. We discuss that models of this type have much in common with other problems in statistical physics and in the theory of complex systems. We study a simplified version of our model analytically. Furthermore, we perform extensive numerical simulations for the full model. The observables are the loss distribution of the credit portfolio, its moments and other quantities derived thereof. We compile detailed information about the parameter dependence of these observables. In the course of setting up and analyzing our model, we also give a review of credit risk modeling for a physics audience.

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