Zhao, Hongbiao (2011) Portfolio credit risk of default and spread widening. The Author. (Unpublished)
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This paper introduces a new model for portfolio credit risk incorporating default and spread widening in a simple and consistent framework. Credit spreads are modelled by geometric Brownian motions with a dependence structure powered by a t-copula. Their joint evolution drives the spreads widening and triggers defaults, and then the loss can be calculated accordingly. It is a heterogeneous model that takes account of different credit ratings and term structures for each underlying spread. This model is applicable to portfolio credit risk management, stress test, or to fit into regulatory capital requirements. The procedures of parameter calibration and scenario simulation are provided. A detailed example is also given to see how this proposed model can be implemented in practice.
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