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Portfolio Credit Risk: Top Down vs. Bottom Up Approaches

by Kay Giesecke of Stanford University

February 8, 2008

Abstract: Dynamic reduced form models of portfolio credit risk can be distinguished by the way in which the intensity of the default process is specified. In a bottom up model, the portfolio intensity is an aggregate of the constituent intensities. In a top down model, the portfolio intensity is specified without reference to the constituents. This expository article contrasts these modeling approaches. It emphasizes the role of the information filtration as a modeling tool.

This paper is republished as Ch. 10 in...

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