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Random thinning model with a truncated credit quality vulnerability factor: Application to top-down-type credit risk assessment

Author

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  • Suguru Yamanaka

    (Faculty of Engineering, Musashino University, 3-3-3 Ariake Koto-ku, Tokyo 135-8181, Japan)

Abstract

In the top-down approach of intensity-based credit risk modeling, a procedure called “random thinning” is needed to obtain credit event intensities for sub-portfolios. This paper presents a random thinning model incorporating a risk factor called the credit quality vulnerability factor (CQVF) to capture time-series variation in credit event occurrence in a target sub-portfolio. In particular, we propose a type of CQVF that follows truncated normal distributions specified by macroeconomic variables. Using credit event samples of Japanese firms, our empirical analysis aims to clarify the applicability and effectiveness of the proposed model to practical credit risk management. Since macroeconomic variables are included in our model, it is applicable to the macro-stress testing of portfolio credit risk management within a top-down-type framework.

Suggested Citation

  • Suguru Yamanaka, 2019. "Random thinning model with a truncated credit quality vulnerability factor: Application to top-down-type credit risk assessment," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 1-13, September.
    • Handle: RePEc:wsi:ijfexx:v:06:y:2019:i:03:n:s2424786319500245
    DOI: 10.1142/S2424786319500245
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    References listed on IDEAS

    as
    1. Suguru Yamanaka & Masaaki Sugihara & Hidetoshi Nakagawa, 2012. "Modeling of Contagious Credit Events and Risk Analysis of Credit Portfolios," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 19(1), pages 43-62, March.
    2. Kay Giesecke & Baeho Kim, 2011. "Risk Analysis of Collateralized Debt Obligations," Operations Research, INFORMS, vol. 59(1), pages 32-49, February.
    3. Kay Giesecke & Lisa R. Goldberg & Xiaowei Ding, 2011. "A Top-Down Approach to Multiname Credit," Operations Research, INFORMS, vol. 59(2), pages 283-300, April.
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