A Comparative Anatomy of Credit-Risk Models
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| Venue: | Journal of Banking and Finance |
| Citations: | 224 - 9 self |
BibTeX
@ARTICLE{Gordy_acomparative,
author = {Michael B. Gordy},
title = {A Comparative Anatomy of Credit-Risk Models},
journal = {Journal of Banking and Finance},
year = {},
pages = {1--119}
}
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Abstract
Within the past two years, important advances have been made in modeling credit risk at the portfolio level. Practitioners and policy makers have invested in implementing and exploring a variety of new models individually. Less progress has been made, however, with comparative analyses. Direct comparison often is not straightforward, because the different models may be presented within rather different mathematical frameworks. This paper offers a comparative anatomy of two especially influential benchmarks for credit risk models, J.P. Morgan’s CreditMetrics and Credit Suisse Financial Product’s CreditRisk +.Weshow that, despite differences on the surface, the underlying mathematical structures are similar. The structural parallels provide intuition for the relationship between the two models and allow us to describe quite precisely where the models differ in functional form, distributional assumptions, and reliance on approximation formulae. We then design simulation exercises which evaluate the effect of each of these differences individually. JEL Codes: G31, C15, G11 ∗The views expressed herein are my own and do not necessarily reflect those of the Board of Governors or its staff. I would like to thank David Jones for drawing my attention to this issue, and for his helpful comments. I am also grateful to Mark Carey for data and advice useful in calibration of the models, and to Chris Finger and Tom Wilde for helpful comments. Please
Keyphrases
comparative anatomy credit-risk model helpful comment tom wilde le progress distributional assumption simulation exercise influential benchmark mark carey comparative analysis mathematical structure direct comparison policy maker structural parallel important advance new model functional form approximation formula credit risk different mathematical framework j.p. morgan david jones credit suisse financial product creditrisk jel code chris finger different model portfolio level credit risk model
