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From CreditMetrics to CreditRisk+ and Back Again

by Michael B. Gordy of the Federal Reserve Board

June 23, 1998

Abstract: In the short time since their public releases in 1997, J.P. Morgan's CreditMetrics and Credit Suisse's CreditRisk+ have become influential benchmarks for internal credit risk models.  Practitioners and policy makers have invested in implementing and exploring each of the models individually, but have made less progress with comparative analyses.  Direct comparison of the models is not straight- forward, because the two models are presented within rather different mathematical frameworks.  One is familiar to econometricians as an ordered probit model, the other is based on insurance industry models of event risk.  CreditMetrics and CreditRisk+ may be addressing the same topic, but they appear to speak in different languages.

This paper develops methods for translating between these two languages.  I show how a restricted version of CreditMetrics can be run through the mathematical machinery of CreditRisk+ , and how CreditRisk+ can be mapped into a version of CreditMetrics.  A series of simulation exercises uses these translation methods to evaluate the robustness of each model to the assumptions of the other, and to isolate the models' most sensitive restrictions.

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