Analytic Loss Distributions of Heterogeneous Portfolios in the Asset Value Credit Risk Model

by Uwe Wehrspohn of Heidelberg University

May 2003

Abstract: We provide an analytic solution to the asset value credit risk model that allows for heterogeneous correlations, default probabilities, recovery rates and exposures given certain regularity conditions are fulfilled.

Additionally, we extend the asset value model to include event risks such as country risk or dependencies between individual clients and derive analytic loss distributions and loss densities.

All results can be implemented in spreadsheet calculators such as Microsoft Excel or Lotus 1-2-3.

JEL Classification: C63, G21.

Keywords: credit portfolio risk, analytical loss distribution, country risk, microeconomic risk, asset value model.

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