On the parameterization of the CreditRisk(+) model for estimating credit portfolio risk

Vandendorpe, Antoine;Ho, Ngoc-Diep;Vanduffel, Steven;Van Dooren, Paul
(2008) Insurance: Mathematics and Economics — Vol. 42, n° 2, p. 736-745 (2008)

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Authors
  • Vandendorpe, Antoine
    Author
  • Ho, Ngoc-DiepUCLouvain
    Author
  • Vanduffel, StevenUCLouvain
    Author
  • Van Dooren, PaulUCLouvain
    Author
Abstract
The CreditRisk(+) model is one of the industry standards for estimating the credit default risk for a portfolio of credit loans. The natural parameterization of this model requires the default probability to be apportioned using a number of (non-negative) factor loadings. However, in practice only default correlations are often available but not the factor loadings. In this paper we investigate how to deduce the factor loadings from a given set of default correlations. This is a novel approach and it requires the non-negative factorization of a positive semi-definite matrix which is by no means trivial. We also present a numerical optimization algorithm to achieve this. (C) 2007 Elsevier B.V. All rights reserved.
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Vandendorpe, A., Ho, N.-D., Vanduffel, S., & Van Dooren, P. (2008). On the parameterization of the CreditRisk(+) model for estimating credit portfolio risk. Insurance: Mathematics and Economics, 42(2), 736-745. https://doi.org/10.1016/j.insmatheco.2007.08.006 (Original work published 2008)