Institute of Information Theory and Automation

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Journal Article

Dynamic Multi-Factor Credit Risk Model with Fat-Tailed Factors

Gapko Petr, Šmíd Martin

: Finance a úvěr-Czech Journal of Economics and Finance vol.62, 2 (2012), p. 125-140

: CEZ:AV0Z10750506

: GAUK 46108, Univerzita Karlova, GD402/09/H045, GA ČR, GA402/09/0965, GA ČR

: credit risk, probability of default, loss given default, credit loss, credit loss distribution, Basel II

: multi-factor credit risk model with fat-tailed factors.pdf

(eng): We introduce an improved multi-factor credit risk model describing simultaneously the default rate and the loss given default. Our methodology is based on the KMV model, which we generalize in three ways. First, we add a model for loss given default (LGD), second, we bring dynamics to the model, and third, we allow non-normal distributions of risk factors. Both the defaults and the LGD are driven by a common factor and an individual factor; the individual factors are mutually independent, but we allow any form of dependence of the common factors. We test our model on a nationwide portfolio of US mortgage delinquencies, modeling the dependence of the common factor by a VECM model, and compare our results with the current regulatory framework, which is described in the Basel II Accord.

: AH

2019-01-07 08:39