Tail Approximation for Credit Risk Portfolios with Heavy-tailed Risk Factors
by Krassimir Kostadinov of the Munich University of Technology
Abstract: We consider a portfolio credit risk model in the spirit of CreditMetrics. The multivariate normally distributed underlying risk factors in that model are replaced by more general multivariate elliptical factors with heavy-tailed marginals, introducing tail-dependence. We consider a full-scale version of the model, i.e. we incorporate not only the default risk, but also rating migrations, credit spread volatility and recovery risk.
Keywords: risk contributions, portfolio credit risk, stock. approximation, tail dependence.
Published in: Journal of Risk, Vol. 8, No. 2, (Winter 2006), pp. 81-107.