Credit Risk - Things To Remember
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by: werbmaster19
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There is a significant interest today to the default risk modeling, and this fact explains the great diversity of macroeconomics books dedicated to the mentioned topics. Several kinds of credit risk models are allotted in the contemporary literature. Most authors pay particular attention to the analysis of bankruptcy risk at the firm level. There have been developed 4 groups of default risk models so as to analyze portfolio risk. The so-called structural group of models is founded on the principle that the default of a firm is caused by the fact that the value of its assets is lower than the value of its liabilities. The second group includes the econometric factor risk models and their statement is that the credit risk of homogeneous subgroups is determined by macroeconomics index and other econometric factors. The mentioned 2 groups of risk models get a common approach that is declared in computing default rates. The third group combines the so-called actuarial models that don't include causality. And eventually, the fourth group of default risk models is devoted to non-parametric methods.
Although the principles of the mentioned 4 kinds of credit risk models seem to be totally different, they are still based on 3 more or less general ingredients that are applied to calculate portfolio loss distributions. These are the procedure of generating conditional default rates for the borrowers, the structure allowing to calculate conditional default rate distributions and the procedure of aggregating homogeneous subportfolios' conditional distributions. The experts also underline that all the credit risk models have similar mathematical structures.
In addition to the application of the default risk models for analyzing portfolio risk, the default risk models are also used for calculation of capital requirements for banks. For example, the works of Extrella are devoted to the creation of the model of the bank capital that can be regarded as optimal. Moreover, several works are linked with the reference of macroeconomic conditions to the default risk management. You can find a precise survey on the introduction of systemic influences into risk assessment in the research accomplished by Saunders and Allen.
A substantial influence on the modern society has a paper that is devoted to the development of a survival time model for default of business-loan borrowers. The particular feature of this model is that it includes firm-specific, as well as macroeconomic explanatory variables. In such a way, the model can be successfully applied not just for business default analysis, but in the form of a portfolio credit risk model as well.
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