Title: Modelling the default risk in large credit portfolios

Authors: Beatrice Acciaio, Stefano Herzel

Addresses: Department of Economy, Finance and Statistics, University of Perugia, Via A. Pascoli 20, 06123 Perugia, Italy. ' Faculty of Economics, University of Rome 'Tor Vergata', Via Columbia, 2, 00133 Rome, Italy

Abstract: We propose a reduced-form model for credit risk in a multivariate setting. The default intensities are linear combinations of three independent affine jump-diffusion processes representing the intensities of general, sectoral and idiosyncratic credit events. The model can be efficiently calibrated to term structures of default probabilities and conditional probabilities of default given the occurrence of common credit events. We analyse the correlation of defaults and formulate an algorithm for the exact simulation of default scenarios.

Keywords: financial risk; credit risk; default risk; reduced-form model; affine jump diffusions; large credit portfolios; risk assessment; modelling; simulation.

DOI: 10.1504/IJRAM.2010.037086

International Journal of Risk Assessment and Management, 2010 Vol.14 No.6, pp.479 - 503

Received: 25 Jul 2009
Accepted: 03 Jun 2010
Published online: 23 Nov 2010 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article