|
Post by Sapphire Capital on Sept 2, 2008 20:59:47 GMT 4
Credit Risk Modeling Challenges Wael H. Fayyad Oracle Corporation July 10, 2008 Abstract: Credit risk poses modeling challenges beyond those posed by the market risk modeling. For example, the loss distribution is far from normal and measuring portfolio effect due to diversification is much more complex. Not to mention scarcity of data. Also, it is not uncommon to have data of questionable quality. The assessment of the risk models is predominantly an analysis of the modeling assumptions and of the estimation techniques of related inputs. Four techniques are widely used by industry to value credit risk: credit migration approach, as proposed by JP Morgan with CreditMetrics, Structural approach, as initiated by KMV, Credit Risk proposed by Credit Suisse Financial Products (CSFP). Credit Portfolio View proposed by McKinsey and Company. This paper present a literature review of the conceptual problems found at all of the four models. By describing the difference in functional forms, distribution assumption and reliance on approximation formulae we show that-if overlooked- the four models have considerable limitations that may lead to an invalid estimation, analysis and pricing of portfolio risk. papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1242156_code704019.pdf?abstractid=1240022&mirid=3
|
|