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Copula, Correlated Defaults and Credit VaR
Year Of Publication: 2010
Month Of Publication: June
Pages: 35
Download Count: 15
View Count: 1801
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 10-2-2010
Publisher: Administrator
Almost every finance institution pays lots of attention and energy to deal with credit risk. The default correlations of credit assets have a fatal influence on credit risk. How to model default correlation correctly has become a prerequisite of effective management of credit risk. In this thesis, we provide a new approach to estimate future credit risk on target portfolio based on the framework of CreditMetricsTM by J.P. Morgan. However, we adopt the perspective of factor copula and then bring the principal component analysis concept into factor structure to construct a more appropriate dependence structure among credits. In order to examine the proposed method, we use real market data instead of virtual one. We also develop a tool for risk analysis which is convenient to use, especially for banking loan businesses. The results show the fact that people assume dependence structures are normally distributed will indeed lead to risks underestimate. On the other hand, our proposed method captures better features of risks and shows the fat-tail effects conspicuously even though assuming the factors are normally distributed.
Chang, Jow-ran Sign in to follow this author
Chen, An-Chi Sign in to follow this author
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