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Comparative Analysis of Alternative Credit Risk Models: An application on German middle market loan portfolios

by Markus Kern of the Ludwig-Maximilians-University Munich, and
Bernd Rudolph of the Ludwig-Maximilians-University Munich

January 2001

Abstract: In recent years new methods and models have been developed to quantify credit risk on a portfolio basis. CreditMetrics™, CreditRisk + , CreditPortfolioView™ are among the best known and many others are similar to them. At first glance they are quite different in their approaches and methodologies. A comparison of these models especially with regard to their applicability on typical middle market loan portfolios is in the focus of this study. The analysis shows that differences in the results of an application of the models on a certain loan portfolio is mainly due to different approaches in approximating default correlations. That is especially true for typically non-rated medium-sized counterparties. On the other hand distributional assumptions or different solution techniques in the models are more or less compatible.

JEL Classification: C15, G21, G33.

Keywords: credit risk management, portfolio modelling, medium-sized debtors.

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