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A Generalized Single Common Factor Model of Portfolio Credit Risk
Company: Federal Deposit Insurance Corporation
Year Of Publication: 2007
Month Of Publication: March
Pages: 45
Download Count: 337
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Comment Num: 0
Language: EN
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Who Can Read: Free
Date: 6-28-2007
Publisher: Administrator
Summary
The Vasicek single factor model of portfolio credit loss is generalized to include correlatedstochastic exposures and loss rates. The new model can accommodate any distribution andcorrelation assumptions for the loss and exposure rates of individual credits and will producea closed-form approximation for an asymptotic portfolio’s conditional loss rate. Revolvingexposures are modeled as draws against committed lines of credit. Draw rates and loss rateson defaulted credits are random variables with known probability distributions. Dependenceamong defaults, individual exposures, and loss rates are modeled using a single commonGaussian factor. A closed-form expression for an asymptotic portfolio’s inverse cumulativeconditional loss rate is used to calculate a portfolio’s unconditional loss rate distribution,estimate economic capital allocations, and analyze portfolio loss rate characteristics. Positivecorrelation in individual credit exposures and loss rates increases systematic risk. As aconsequence, portfolio loss rate distributions exhibit wider ranges and greater skewne
Author(s)
Kupiec, Paul Sign in to follow this author
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