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An Extended Analytical Approach to Credit Risk Management

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  • Alexandre Kurth
  • Hadley Taylor
  • Armin Wagner

Abstract

type="main" xml:lang="en"> Among the ‘reduced form models’ for measuring the credit risk of a bank's portfolio is CreditRisk+, which provides a closed–form solution for calculating the portfolio loss distribution based on an actuarial approach. The limitations of this model are well known, but they are often misinterpreted as being deeply embedded within the model. Dismantling the mathematical components of the model allows one to modify and extend it in several ways while remaining within an analytical approach. One of the most unattractive features is the orthogonality of the background factors or sectors as it hinders any resemblance to real–world macroeconomic indexes or industrial sectors and geographical areas. Among other extensions, which we mention briefly, we present in more detail how the original model can be amended to consider correlations among default risk sectors and among severity risk segments. These extensions are applied to real–life data, based on mortality rate data produced by the Italian Central Bank. (J.E.L.: C00, C51).

Suggested Citation

  • Alexandre Kurth & Hadley Taylor & Armin Wagner, 2002. "An Extended Analytical Approach to Credit Risk Management," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 31(2), pages 237-253, July.
    • Handle: RePEc:bla:ecnote:v:31:y:2002:i:2:p:237-253
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    File URL: http://hdl.handle.net/10.1111/1468-0300.00086
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    Cited by:

    1. J. ANNAERT & Crispiniano Garcia Joao Batista & J. LAMOOT & G. LANINE, 2006. "Don’t Fall from the Saddle: the Importance of Higher Moments of Credit Loss Distributions," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 06/367, Ghent University, Faculty of Economics and Business Administration.
    2. Maria Stefanova, 2012. "Recovery Risiko in der Kreditportfoliomodellierung," Springer Books, Springer, number 978-3-8349-4226-5, September.

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