Portfolio Credit: Top Down vs. Bottom Up Approaches

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Portfolio Credit: Top Down vs. Bottom Up Approaches

by Kay Giesecke of Stanford University

February 8, 2008

Abstract: Dynamic reduced form models of portfolio credit risk can be distinguished by the way in which the intensity of the default process is specified. In a bottom up model, the portfolio intensity is an aggregate of the constituent intensities. In a top down model, the portfolio intensity is specified without reference to the constituents. This expository article contrasts these modeling approaches. It emphasizes the role of the information filtration as a modeling tool.

Forthcoming in: Frontiers in Quantitative Finance: Credit Risk and Volatility Modeling, R. Cont (Ed.), Wiley, 2008.

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