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CreditRisk+ A Credit Risk Management Framework

by Tom Wilde of CSFB

October 1997

Introduction: CREDITRISK+ is based on a portfolio approach to modelling credit default risk that takes into account information relating to size and maturity of an exposure and the credit quality and systematic risk of an obligor.

The CREDITRISK+ Model is a statistical model of credit default risk that makes no assumptions about the causes of default. This approach is similar to that taken in market risk management, where no attempt is made to model the causes of market price movements. The CREDITRISK+ Model considers default rates as continuous random variables and incorporates the volatility of default rates in order to capture the uncertainty in the level of default rates. Often, background factors, such as the state of the economy, may cause the incidence of defaults to be correlated, even though there is no causal link between them. The effects of these background factors are incorporated into the CREDITRISK+ Model through the use of default rate volatilities and sector analysis rather than using default correlations as explicit inputs into the model.

Mathematical techniques applied widely in the insurance industry are used to model the sudden event of an obligor default. This approach contrasts with the mathematical techniques typically used in finance. In financial modelling one is usually concerned with modelling continuous price changes rather than sudden events. Applying insurance modelling techniques, the analytic CREDITRISK+ Model captures the essential characteristics of credit default events and allows explicit calculation of a full loss distribution for a portfolio of credit exposures.

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The CreditRisk+ site has more good things such as example spreadsheets.

Related reading: " CreditMetrics -- Technical Document"