On the parameterization of the CreditRisk\(^+\) model for estimating credit portfolio risk. (English) Zbl 1152.91608
Summary: 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.
MSC:
| 91G40 | Credit risk |
Software:
CreditRisk+References:
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