Factor Models for Portfolio Credit Risk

by Philipp J. Schönbucher of Bonn University

December 2000

Abstract: This paper gives a simple introduction to portfolio credit risk models of the factor model type. In factor models, the dependence between the individual defaults is driven by a small number of systematic factors. When conditioning on the realisation of these factors the defaults become independent. This allows to combine a large degree of analytical tractability in the model with a realistic dependency structure.

JEL Classification: G13.

Keywords: Default Risk, Portfolio Models.

Published in: Journal of Risk Finance, Vol. 3, No. 1, (2001), pp. 45-56.

Download paper (142K PDF) 20 pages