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Portfolio credit risk of default and spread widening

Zhao, Hongbiao (2011) Portfolio credit risk of default and spread widening. The Author. (Unpublished)

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Abstract

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.

Item Type: Monograph (Other)
Official URL: http://www2.lse.ac.uk/fmg/home.aspx
Additional Information: © 2011 The Author
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C30 - General
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation
G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Sets: Departments > Statistics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 04 May 2012 08:52
URL: http://eprints.lse.ac.uk/43451/

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